To stay or not to stay

Greece's Decisive Week to Shape FX Volatility over the Summer

While the Greek government is struggling to agree on reforms with its creditors to receive aid, volatility will implode in

With the usual summer lull in trading volumes fast approaching, we are yet to see if this year is going to be any different from the steady trend observed in the past several holiday seasons. Last year was probably the slowest in terms of volumes and volatility before the U.S. dollar began its massive moves in August to charge hard against its peers for a number of months.

With major currencies trading in a range for the past couple of months we are observing a drop in volumes across major brokers and subsequently a decline in expectations for a substantial rebound to occur this summer.

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This holiday season may be much more different though – the summer lull is under threat from a Greek default. Brokers and traders alike love volatility and the latest actions (or rather inaction) by the Greek government could lead to a very robust rebound in trading volumes this month and most likely throughout the bulk of summer 2015.

Failing to Compromise

Looking at the current Greek negotiations, both sides of the aisle have raised charges against each other for lacking flexibility. That could be the case, however it is Greece that is closing in on a default and the implementation of capital controls for the country.

At the last minute meeting in Brussels on Sunday, the Greek government representatives and European officials once again failed to reach any consensus. This follows the breaking news on Thursday, that representatives of the International Monetary Fund (IMF) left the table.

Capital controls will be required

Analysts from Barclays commented in a research note issued this morning, “If no agreement is achieved before the end of the month, capital controls will be required as the ECB would have to increase the haircut on Greek assets and eventually freeze any additional ELA (the Emergency Liquidity Assistance program, which Greek banks are receiving from the central bank).”

The massive hit to the European Central Bank’s balance sheet could result in a liquidity squeeze, and contrary to general expectations there is a good likelihood that this could make the euro rally after a brief spike lower in the EUR/USD.

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Prospects for the Greek Government

At this point in time there is not much choice left for Alexis Tsipras and his government. There is a good chance that if he chooses a default, his party will soon be forced out of power. Greek voters were promised an unrealistic achievement by the populist agenda of SYRIZA – to stay in the euro zone and to get much better bailout terms.

From the looks of it, this ain’t going to happen, not until Greek politicians bow to at least some creditors’ demands.

We think the majority of Greeks will blame the government

Early elections will have two different outcomes depending on the situation in which the government of Tsipras leaves the country in. If his party wants to remain in power he will have to immediately change negotiating tactics and go for early elections with a more realistic promise.

The research note from Barclays highlights, “If there will be no deal with creditor institutions, bank controls to limit deposit outflows and transfers abroad would be required. We think the majority of Greeks will blame the government for the failure in negotiations and the freezing of their deposits.”

Impact Across Foreign Exchange Markets

Speaking to Finance Magnates’ reporters, the Managing Director of online trading broker UFX.COM, Dennis De Jong shared, “The fall on the Athens stock exchange index shows us that a large number of investors are currently fleeing the Greek stock market, in an attempt to save as much capital as possible.”

We could see the euro drop to parity by the end of 2015

“The volatility we are seeing shows us that an agreement with Greece and the Eurozone is far from happening, if possible at all,” he added

Commenting on the EUR/USD exchange rate, Mr De Jong elaborated, “The EUR/USD is expected to drop to its lowest levels ever recorded. We could see the euro drop to parity by the end of 2015.”

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