German Greek Standoff Dulls Forex

Greek drama continues to unfold

U.S front end yields support dollar

ECB’s policies squash periphery fears

Fed in a position to change rhetoric

It’s not much of a surprise to see the various asset classes treading water this morning as investors await on a couple of crunch meetings on the future of financial aid to Greece. The Greek drama continues to unfold as the Eurogroup holds an extraordinary meeting today and again meet on February 16th. The uncertainty of the outcome will mean ongoing volatility in various asset classes. Hopes for a quick deal do not look forthcoming, nevertheless there could still be room for a deal before Monday’s pivotal meet up – that is if Germany is an a forgiving mood.

Germany’s Unforgiving Mood

The press will have you believe that the hardline stance from Germany versus the afflicted posture from Greece is coming down to the wire. Greece wants to scrap about 30% of the current bailout’s conditions and replace it with measures approved by the OECD. The current bailout is due to expire in two weeks. Global investors are obviously concerned that a head-to-head between the Greek PM Tsipras government and the country’s international creditors could instigate the country’s exit from the eurozone and be the beginning of another round of financial instability in Europe. Reporting seems to believe that the Greek stance in the talks is unworkable and that Euro disaster is imminent. The reality is that Capital Markets are pricing some kind of “stopgap” funding deal for Greece. There is too much to lose for everyone, including Germany. Any stopgap measure will allow ECB funding for Greek financial institutions and importantly provide more time for talks to continue and perhaps cooler heads to prevail.

Tactical vs. Practical

Investors should be expecting the forex landscape to be more about tactical positioning rather than outright data driven moves as euro-political tension currently trumps imminent economic releases. Fundamental data remains in short supply, big let down from last weeks events. The reality is that today’s Eurogroup meeting is the first step in a Greek debt negotiation process with no obvious near term deadlines that are required to be met. The market is focusing on the end of this month, as the deadline is technically irrelevant especially now that the ECB has pulled its waiver on Greek collateral. In truth, Greece has an obligation to fulfill a couple of IMF repayments next month, but the significant repayments that PM Tsipras and company ought to meet do not occur until the middle of July. The reality is that investors and capital markets most likely will be held hostage by the Greek tragedy for some time yet.

Euro Contagion Squashed

When discussing Europe, contagion is a natural fear amongst the peripheries. Despite euro-periphery spreads having a softer tone of late (Portugal and Spain), investors fear of contagion should be rather limited, mostly on the back of the ECB’s policy efforts over the last couple of years. Investors appetite for yield, any yield, in the current “deflationary” threatened environment should be providing technical support for periphery spreads, and having the ECB as a backstop ought to make it easier for investors to make that decision.

There is very little natural movement in the major currency pairs. With U.S short-term yields trading atop of their one-month highs, pushed there after last week’s non-farm payrolls report, continues to provide the USD support. Yesterday’s JOLTS job opening data in the U.S came in at a 14-year high and certainly solidifies the buoyant jobs scene in the U.S. The market perhaps now should be anticipating a change to Fed rhetoric. The possibility of “patient” actually disappearing from next months Fed statement is now more of a reality. Investors need to focus on front-end yields to gage support for the dollar. If they remain close to current levels then yield differentials will obviously favor the USD versus, JPY, EUR and CHF. However, with heightened “event” and “political” risk investors should not be willing to force their positioning.