Eur-rational Exuberance

Since mid March the EUR/USD has climbed from 1.0468 to 1.1350, which is where it’s at as I write this article. Over those same three months the Greek situation has deteriorated and they are now as close as ever to default and an exit from the euro.

Let me repeat and emphasize this point. The European Monetary Union is as close as it has ever been to seeing a member country default on many billions of debt and exit from the euro, yet somehow the pair is up 900 pips over the last three months.

Meanwhile the U.S. reports better than expected payroll numbers and we hear of earlier and earlier projections on its first rate increase. Can someone tell me what I'm missing here? Why did the euro recover from its Q1 slide?

It is still more likely than not that they'll either strike a deal or extend deadlines and the politicians will continue to kick the Greek can down the road. That doesn't change the underlying problem though. Greece is still projected to run a budget deficit again this year! In spite of all this pressure and the international criticism they face, their indebtedness will worsen. They are not a credit worthy country and still this late in the negotiations they are not willing to commit to policies that would make them creditworthy.

Admittedly, there remains a great deal of pressure to keep the union intact. However, you can see the exhaustion factor growing among the European leaders sitting across the table from Tsipras and Varoufakis (Varoufakis isn't even allowed at the table anymore). There are dissenters even on Merkel’s team. Schauble wants them out.

Something to keep in mind is that striking a deal doesn't mean a beginning of the end. If they do strike a deal by the end of the month, Greece will have access to another €7.2 billion in rescue funds. The problem is that they owe €12 billion to the troika between now and the end of the year, and another €9 billion on their own T-Bills. Striking a deal now just means another lap on the same merry-go-round. At some point the exhaustion factor will trump all ambitions to avoid a defection. Merry-go-rounds cease being any fun by the third go-around.

If you're long the euro, be careful.