A resolution to the Greek crisis seems to fade away each time it gets close. Reaction in the euro were uneven and not always straightforward.
What can we expect next? The team at Morgan Stanley weighs in:
Here is their view, courtesy of eFXnews:
Another deadline has come and gone with Greece appearing to be no closer to a deal with its creditors, notes Morgan Stanley.
“The focus is now on the month-end IMF payment along with Greece’s regular wage and pension bill. Beyond here, the ECB payment due July 20 is set to be seen as critical,” MS adds.
“The likely EUR reaction to Greek developments is far from simple, where the asset market and broader risk impact have a vital role, for near-term activity at least,” MS argues.
In at attempt to provide more insights on that, MS outlines the 3 key scenarios in its Greek playbook and how they likely impact the EUR.
Scenario 1 (Base-Case): An Agreement is Reached, No Capital Controls Required.
“In this scenario, we believe that EUR will resume its grind lower. European risk assets are likely to rally; and with foreign investors having bought EUR shares largely on an FXhedged basis, higher asset valuations are likely to prompt additional EUR selling via hedge adjustments…Last but not least, a Greek solution should also encourage risk-averse Europeans to again recycle the EMU’s current account abroad, sending the EUR broadly lower,”MS clarifies.
Scenario 2: Positive Steps Made, Temporary Capital Controls Set Up.
“If capital controls are required, but with positive steps being made, risk will be challenged and declining asset markets could see EUR buying as hedges are reduced, providing temporary technical support…Thus, while we expect EUR strength under this scenario, we believe it will be a technical, rather than structural correction,” MS argues.
Scenario 3: Capital Controls Enforced, Greece Moves Closer To Exit.
“If no agreement is achieved, and Greece moves closer to EMU exit, we believe that this would represent the most bearish scenario for EUR… Should Greece exit, the OMT will probably need to be activated, and the ECB would need to ease further in order to prevent contagion risk and a collapse in inflation expectations. Consequently, with a material increase in EUR supply hitting the markets from a wide range of market participants simultaneously, EUR is likely to accelerate to the downside; in this environment, our year-end target of 0.9800 may be hit much sooner,” MS projects.
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