FX Volatility Alert: The European Central Bank QE and Grexit Prospects

Some of the major brokerages have started reducing leverage limits, emphasizing the triggers for this move, some industry insiders have

EuroWhile the industry is still in shambles from the recent turmoil caused by the Swiss National Bank (SNB), what now needs to be done is to look forward. This week will see two of the most volatility stirring events since the beginning of 2015. Albeit expected, some may come unprepared for the implications of an unlikely (for now) Greek exit from the Eurozone.

A number of big brokers have already prepared for what may be a paradigm shift in not only foreign exchange, but across the broad financial markets volatility. By using higher margin requirements, the clients of a brokerage are increasingly protected against those negative balances some clients ended up with in the aftermath of the SNB’s decision.

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Industry insiders who chose to remain off the record, have shared with Forex Magnates that preparing clients for the ‘new normal’ in volatility has to signal the need for having sufficient margin to support potentially bigger and more extreme short-term shocks.

The Swiss franc turmoil is only one example of the heightened volatility going forward. This week’s potential quantitative easing announcement from the ECB and the election in Greece, January  25, are other such events.

After the CHF tornado that swept through the currency markets damaging traders and brokers alike, what will differentiate industry leaders from the rest is what steps they will take to help their clients manage their risk with prudence and be prepared better for potential market moves.

European Central Bank Quantitative Easing

The prospects for a quantitative easing program by the European Central Bank have been increasing in recent weeks. But what is its scope and how will the market react to it?

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While the market knows that it is coming, a big part of the prospective QE move by the ECB might already be priced into the market. The bigger risk however, remains that the euro will go yet again lower. Heightened risks for fragility and division within the ECB governing council, further isolating Germany and its supporters for sound money, could drop a bomb on the foreign exchange markets.

By no means will it be as dramatic as the Swiss franc debacle from last week, however the theme of increased global uncertainty is here to stay. The ECB will merely become another one of the politicized central bank institutions that are following up on governments’ agenda for easy money.

An economist from the German ZEW institute stated on Tuesday that quantitative easing is already reflected into the price of the european currency… but there is more.

Greek Elections and the Prospects for a ‘Grexit’

Just a couple of days before the elections in Greece, the lead of the radical leftist coalition headed by Alexis Tsipras, SYRIZA, widened to between 4 and 6.5% against conservatives from New Democracy.

Is a leftist government in Greece already priced into the market? Probably to a big extent it is. What remains to be seen is how SYRIZA will form a government if it wins, and how it will act in the face of pressure from its partners from the European Union and the International Monetary Fund.

The last time we had Greek elections in 2012, there was a snap election in the aftermath of the first one. While Greek politicians appear very strong and committed to their voters before taking power, in the aftermath of the European sovereign debt crisis, their pre-electoral promises have usually collapsed under the heavy burden of the country’s burgeoning debt.

Why should this time be any different?

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