While the Greek saga remains far from over, after facing a number of political hurdles both locally and across the Euro zone, a prospective deal between Greece and its creditors seems much more likely than not.
As the uncertainty which has engulfed the markets for the past couple of weeks dissipates, the carry trade is back with the euro remaining the preferred funding currency. A carry trade is a particular strategy where currency traders borrow funds in a currency where interest rates are low and invest into government or private paper-denominated in a currency where higher interest rates are being paid.
Throughout the years the main funding currency for carry trades has been the Japanese yen, which was later joined by the U.S. dollar as the Federal Reserve introduced its quantitative easing program. Once the European Central Bank officially joined the club of the rapidly working printing presses, the euro became the new market favorite for cheap funding of carry traders since the start of 2015.
The single European currency unit has come under pressure right after the initial spike
The single European currency unit has come under pressure right after the initial spike caused by the Eurogroup’s announcement on Monday morning.
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With the majority of the opposition parties supporting Greek Prime Minister Alexis Tsipras to broker a third bailout deal with the country’s top creditors, another set of parliamentary votes is looming. After the agreement was tentatively reached, the Greek side has yet to pass legislation warranting the implementation of the long-delayed reforms which Greece has to implement in order to continue receiving funding from its European partners.
Brokers who ramped up margin requirements have been reverting those in the aftermath of the announcement this morning. That said, the overwhelming mood among market participants has been that the Greek solution is another “kick the can down the road” scenario.
Today’s deal does kick the underlying issues further into the future
Commenting on the matter, the Chief Economist at FxPro, Simon Smith said, “Greece has been ‘saved’ by a deal, which requires reform measures to be passed mid-week by the Greek parliament (Finland and Germany must also pass in their parliaments).”
“A deal that is reached after months of negotiations with literally hours to spare before a Grexit cannot be a good deal. On the face of it, Greece is the one that has blinked, because the deal does not give any guarantees with regards to the restructuring of Greek debt,” he elaborated.
There’s been a lot of market tension around the negotiations with FX volatility subsiding somewhat in a typical summer fashion. According to Mr Smith, this is unlikely to persist for long, as he commented, “Today’s deal does kick the underlying issues further into the future and at some point, they will have to be addressed.”