Why did the EUR/USD rebound in the latter part of the day? Juncker sends Tsipras an offer to return to the negotiation table, but the prime minister’s answer is not clear yet. The Swiss franc remains above 4.00 PLN despite the dollar returning to the levels seen on the Monday close.
Macro data (CET- Central European Time). Survey is supplied by Bloomberg unless otherwise noted.
- News regarding Greece lowering or increasing odds for further negotiations. New polls regarding a possible referendum result.
It was quite surprising to see the EUR/USD trading yesterday. A significant slide in the morning was in line with expectations, but a rebound which exceeding the 1.12 level probably wasn't predicted by many. We can find many reasons behind such a move, but the real question is which actually holds the truth. Firstly, the SNB confirmed in the morning that it intervened on the market and sold Swiss francs against the euro. It might have discouraged market participants to play against the common currency. Additionally, there was a risk that other central banks might have proceeded with similar actions.
Another reason might be because the polls are showing, regardless of how you ask a question to the Greeks, that they prefer to implement painful reforms and remain in the eurozone. The most important case, however, may be the issues written last week. It is possible that the euro might start to behave like a carry trade funding currency.
When the market is in “risk on” mode and stocks appreciate, the euro is used as a funding currency. It is a result of a loose monetary policy which is going to be supplemented by QE for at least a year. On the other hand, a perspective to rise interest rates across the pond pushes yields higher in many countries which increases their attractiveness.
On the other hand, when there is a need to close positions due to risk aversion, the euro must be brought back and will give the common currency a boost. A similar situation has been observed with the Japanese yen even when the data from Japan or Asia were weak. The yen was regarded, sometimes still is, as a “safe haven”, but it is hard to see why a highly indebted country can be viewed as being safe and sound in the turmoil.
Of course, the euro was regarded differently for years – it benefited in the case of better sentiment. But rule changes do not happen in a matter of days or weeks. So, this is a reason why the most recent moves have generated so much confusion. Additionally, what traders have stressed, the liquidity was very thin. It allowed relatively small capital to generate changes which were able to exploit any option.
Overall, for now, more problems with Greece should weight on the euro. But, on the other hand, if the situation calms down it does not have to translate into euro strength because the “carry trade” may reactivate quite quickly. That's why we wrote last week that the euro may be in a lose-lose situation in the midterm.
A return to negotiations
During the night, Reuters wrote that Juncker presented a last minute offer to Tsipras. The EC chief agreed to keep the VAT at 13% for hotels, which was one of the obstacles in the negotiations. On the other hand, the Commission would like Syriza to change its approach regarding the referendum and push citizens to vote for the deal presented by the creditors.
The Athens government would not like to accept such an offer because before this the VAT issue was regarded as an easy issue to resolve. It was also not the major reason why the negotiations paused. On the other hand, it would be strange for Tsipras to resign from a referendum after such a small concession.
However, at midday “Ekathimerini” reported that the Greek prime minister is considering the EC offer. Moreover, according to the media Tsipras is also under pressure from his party who fear the consequences of capital controls. The “Ekathimerni” also reported that the offer from 2012 is still valid. It was supposed to lengthen debt maturity, lower interest rates and deal with some debt moratorium. If the Greek side agrees for such a deal there might be a Eurogroup meeting today.
The foreign market in a few sentences
If Greek's press reports are confirmed we may expect some EUR/USD appreciation. However, it is pretty possible that the rally might be short lived. Taking into account the fundamental changes on the common currency it might be used as an opportunity to open positions against the euro regardless of the future scenario.
The zloty under limited pressure
A hypothetical deal between Greece and its creditors should have a positive impact on the PLN. It should be especially beneficial for people who hold a Swiss franc debt. Also, a significant slide should be seen on the EUR/PLN. It is possible that the zloty would quickly strengthen towards 4.15 per euro. A more complex situation can be seen on the USD/PLN especially if the euro “carry trade” activates.
Contrarily, if the Greek press reports fail to meet expectations, the market will return to a “wait and see” mode. As a result, the zloty would remain under pressure and the franc is expected to remain above 4.00 zloty.
Anticipated levels of PLN according to the EUR/USD rate:
Anticipated GBP/PLN levels according to the GBP/USD rate: