Hard Greek Default Will Send Euro Plunging

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The ECB LTRO helped banks improve their liquidity, but not all shock absorbers are in place for a Greek default – the euro and global stocks would plunge.

David Rodriguez of DailyFX discusses the short term and long term implications of a Greek bankruptcy, the forces that really move USD/JPY, China and other fundamental matters that matter in the interview below.

David Rodriguez is a quantitative analyst for DailyFX.com, specializing in statistical studies in currency trading markets and algorithmic trading systems for the Managed Accounts Programs offered by parent company, FXCM. He holds a degree in Economics from Williams College with heavy emphasis on quantitative methods and began trading financial markets in the tech boom and bust of 1999-2001. Since then, David’s primary focus has shifted from equities to currency markets, but he continues to trade futures and futures options on a broad range of asset classes as well as currencies.

  1. Are all the shock absorbers in place for a Greek bankruptcy? How will the market react to an such an announcement, if it happens?

 

No, I don’t think they are. Let’s not mince words: a hard Greek default could very well be a short-term disaster for market sentiment. We would expect the Euro to fall sharply and global stock markets to react in kind. Yet the longer-term implications are less straightforward. A look at market sentiment shows that everyone remains extremely bearish, and the confirmation of worst fears could be just enough to spark a longer-term Euro recovery.

 

  1. The yen finally began weakening. What figures will have the strongest impact on USD/JPY in the upcoming weeks? Japan’s trade balance, Japanese QE chances of QE3 in the US or something else?

 

I don’t think Japanese economic data will be especially relevant for some time. The Bank of Japan’s monetary policy bias is crystal-clear: they’re positioning for further QE. And I don’t think any one bit of economic data could derail those expectations. I would keep a much closer look across the Pacific in US economic data. The USDJPY remains quite sensitive to US Treasury Yields. Any sharp moves in US yield expectations would likely spark similar reactions in the USDJPY.

 

  1. The Chinese authorities are already reacting to the “landing” with a lower RRR and other measures. Will it manage to continue growing at a strong pace? How will the Australian dollar react?

 

Good question. In the medium-to-longer term, we agree that the Chinese slowdown story could have a significant impact on market sentiment. A slowdown would have an especially clear effect on Australia and New Zealand, putting a distinctly bearish bias on the high-flying AUDUSD and NZDUSD. Yet economists make terrible traders, and there are other factors far more relevant through shorter-term trading. If you want to take a bearish Australian Dollar position based on the China slowdown story, be prepared to see some substantial unrealized losses as well as pay some significant interest rate differentials.

 

  1. Iceland made an economic comeback with dropping unemployment and with its bonds back to investment grade (according to Fitch). Do you think that Iceland’s different approach and success will influence EU leaders to change their approach to the debt crisis?

 

Iceland is a great story. It told foreigners to go fly a kite and reneged on debts. It instituted strong capital controls and let its currency momentarily fall off the face of the Earth. The Icelandic Krona still trades sharply lower, but the result is still that the country was able to get its fiscal house in order. I hesitate to extend the clearly-successful Icelandic model to the Euro Zone. Greece doesn’t have the luxury of devaluing its currency, and Euro Zone leaders have thus far done everything in their powers to avoid an Iceland-style default. It is wishful thinking that Greece could adopt the same measures.

 

  1. Tensions around Iran are rising again around the EU sanctions and the prospects of an Israeli strike. Can rising oil prices derail the gradual improvement in the US economy?

 

Absolutely. Do I lose sleep over it? Not really. Ultimately I don’t think there’s enough global economic growth to send crude oil prices sharply higher. The fact that developing world consumers are now demanding fossil fuels likewise means that the so-called black gold won’t tumble in price. But I would hesitate to dramatize the potential effects of a Crude Oil price jump on the US economy.

 

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Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.