Grexit and the euro: an exercise in guesswork | FT Alphaville

Grexit and the euro: an exercise in guesswork

Everyone who’s anyone (and some other people too) has a view on what will happen to the value of the euro if Greece makes an exit. Probably of dubious predictive use, but here is a selection for your interest (with our emphasis):

Soc Gen’s Kit Juckes:

I have been asked where EUR/USD is oversold if Greece leaves and while this is patently silly question, my instinct is that parity would be ‘too far’ and 1.10 is likely to be reached.

Morgan Stanley’s FX team:

EUR-denominated capital markets would become less attractive as a result, putting EURUSD under selling pressure… Increasing prospects of Greece leaving the euro will keep EUR under selling pressure, in our view. A Greek exit would no longer qualify EMU membership as ‘irreversible’, increasing the risk premium for peripheral assets.

Citi’s Valentin Marinov:

About a year ago EURUSD sold off from close to 1.5000 to 1.4000 in a couple of days. The trigger was the admission by the Greek finance minister that his country will not be able to return to the bond markets as planned in 2012. The market pressure on EUR and other European assets eventually led to a second Greek bailout including a PSI deal formally negotiated during several EU summits in the subsequent months.

Greece is on the brink of default yet again. The strong showing in of anti-bailout parties in the recent elections is threatening to leave Greece without external financial assistance as soon as June. Worse still, calls for Greece to leave the euro are intensifying. Media reports seem to suggest that euro zone politicians and policy makers are now increasingly discussing the possibility of Greek exit.

EURUSD broke out of its 1.3000-1.3200 range following the outcome of Greek election and the implied volatility for the currency pair picked up. The response in FX spot still looks somewhat muted, however, especially compared to the sell-off a year ago. This is also consistent with the observation that there is far less client demand at present for scenario analyses of the impact of a potential Greek exit. All this could imply that investors are now better prepared for more excessive turbulences in the euro zone ahead.

Even if investors seem now less worried about the fallout of a potential Greek exit, the downside pressure on EUR is likely to remain firmly in place in coming days in our view. The Greek president will hold more talks to form a unity government later today. Should these fail and new elections become inevitable, EUR could extend its slide especially against safe haven currencies like USD and JPY. EURGBP could struggle to extend its drop below 0.8000 mark as investor uncertainty about the euro could damage further the attractiveness of its European safe haven alternatives.

Rabobank’s Jane Foley:

We do not expect the EUR to remain on a permanent downward course. If Greece decides to adhere to the terms of its bailout, the EUR would likely recover some ground. If politicians manage to steer EMU through a Greek exit, the EUR would also recover in time. Even on the unlikely event that politicians fail to prevent an EMU collapse and the EUR becomes the currency of Germany and the core, the EUR would also eventually push sharply higher. By year end we expect EUR/USD will be back around EUR/USD1.3200.

JPMorgan’s FX team :

Where does the drachma put the euro? The centrist path illustrated on the left of the chart below should restore EUR/USD to its previous range in the low 1.30s all else equal (e.g. assuming some other bullish dollar force such as a US or Chinese slowdown isn’t in play at the time). The epiphany scenario would deliver significant euro weakness initially (perhaps to 1.20) but then a recovery depending how well the government – or a successor one – reengages the troika and complies with targets. The chaos scenario is the one discussed in the Answers to 10 common questions paper – a wave of capital flight and pre-emptive hedging since investors and corporates will perceive convertibility risk to have risen throughout the region. EUR/USD could drop to 1.10 and 3-mo volatility spike to at least 20%, depending on whether the Greek government followed through on its declaration of EMU exit and whether the G-3 chose to intervene in forex markets. Euroization probably triggers the same euro decline as chaos, since most will assume that reintroducing the drachma is inevitable.

Credit Suisse’s FX team:

We downgraded our EURUSD forecasts last week and now target 1.25 on a three-month basis.

BNY Mellon’s Simon Derrick:

If it is a choice for Athens between staying within the Euro-area under its current configuration or reintroducing the Drachma then we believe they should choose the latter.

And just in from Nomura’s Jens Nordvig:

We have not made formal forecast changes yet, but there is now clearly downside risk to our 1.25 target for EURUSD in Q3. If a Greek Eurozone exit does materialize in the Jul-Sep period, a more realistic target for EURUSD is likely to be in the 1.15-1.20 range.

Related links:
Alphaville’s FX file