Home Debt relief or Grexit

After taking stock of the weekend events, global equity markets have adverted another sharp sell-off and are trading with a modestly optimistic tone this morning.   The greenback broke out of yesterday’s consolidative pattern and is making broad gains across the G10 currency space, capitalizing on a downdraft in the euro that has taken the common-currency back to levels that were seen after the Greek referendum was announced.   A contributing factor to the softness in the euro was the ECB’s decision yesterday to refuse Greece’s request to increase the ELA, while at the same time expanding haircuts on Greek collateral which lessens the support buffer of liquidity.   Today there is a European Finance Minister meeting that will take place prior to the Heads of State summit, where leaders will try to resurrect a third incarnation of a Greek aid program.   At this juncture it appears as if debt relief will need to be a part of the solution for Greece, and whether that comes through a negotiated process or a messy default, it will likely come down to the Euro group deciding what the preferred path for the bloc will be.   There are reports that 16 of the 18 Eurozone countries favour a ‘Grexit’ at this point; however, ejecting a member where the population still wants to be part of the monetary union will prove to be more difficult than a member state leaving voluntarily, so it’s still unclear whether the developments diminish Greece’s negotiating power at the table.

The overnight Asian session kicked off with the Reserve Bank of Australia leaving their benchmark interest rates on hold at 2.00% as expected, though market participants are still expecting an additional rate cut in the coming months as the central bank strives to keep monetary policy accommodative to support growth.   While the RBA didn’t adopt an overtly dovish bias towards the Australian dollar, the reiteration that further depreciation in the AUD is required, along with a combination of softer commodity prices and growing concerns about an economic slowdown in China has the antipodean currency displaying a distinct red hue to its order book this morning.

The accommodative measures unleashed over the weekend in order to prop up both the economy and the stock market may seem like a distant memory to the Government of China, with the sharp sell-off resuming overnight as investors and traders continue to deleverage and reduce exposure.   The Shanghai Comp slipped by an additional 1.26%, while more than 200 companies have halted trading in their shares in order to try and shield themselves from the panicked selling.   The drastic sell-off from the June 12th high is concerning for a number of reasons, though most importantly it will be how domestic demand responds to the stock market volatility, and if the destruction of savings through investment in the last month, derails and already feeble economic recovery that the ruling party is trying so hard to steer through rough waters.   The 60% YTD gain recorded on June 12th in the Shanghai Comp has now been slashed to only 11%, and the dramatic deterioration of wealth to go along with it raises concern a deeper, more prolonged, soft patch for the Chinese economy might be on the horizon if the Government is unable to re-instill confidence in the equity market.   A protracted slow-down in the Chinese economy will have negative knock-on effects for commodity-intensive export-based economies like Canada, potentially acting as a weight on the net export position of the economy.

Speaking of trade balance numbers for the Canadian economy, figures for May just crossed the wires, with the net deficit position growing from the previous month and coming in larger than expected.   The fifth month in a row where exports have declined is not the reinvigoration of the export sector as Governor Poloz has been expecting, especially considering the drag on export volumes was a product of slower activity in the mining sector as opposed to exports of energy products.   The larger than expected net deficit position of $3.3bln will add to the pessimistic tone that is beleaguering the loonie heading into next week’s Bank of Canada interest rate decision, as disappointing GDP growth to begin the second quarter will likely continued to be weighed down by sluggish performance on the net export side, and will increase the chance the BoC begins to pivot to a more dovish monetary policy steer at next week’s meeting.   With USDCAD at cyclical highs witnessed back in March of this year, make sure to speak to your dealing teams on how to capitalize on the elevated volatility heading into the Canadian job figures on Friday and then the BoC interest rate announcement next week.

Further reading:

Is Germany about to accept a big Greek debt restructuring? 5 Developments

EUR/USD: Watching The Decisive T-Junction At 1.0962/55 – JP Morgan

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.