- Greece may exit the Eurozone
- Investors seeking dollar assets
- Canadian dollar stuck in narrow ranges
- Aussie dollar at risk of new lows
Jitters over the possibility of Greece exiting the Eurozone worked in the dollar’s advantage yesterday. International investors sought safety in the form of US Treasuries as the news of Greece running out of cash dominated the financial media. Here are some of the eye-catching headlines.
- “The Greek Eurozone exit edges closer” – The Guardian
- “Fears grow over Greece exit” – The Independent
- “Greece on the Brink” – New York Times
- “Signs the market is girding for a Greek default” – MarketWatch
The European Commission estimates that Greece has enough cash to last two weeks. Bloomberg reported “the Greek government issued a decree that forces local governments to transfer all cash balances to the central bank.”
So what’s next? The Eurogroup will meet on Friday and, again, the market expects no agreement. The Greek government is no mood to comprise its demand to roll back the IMF austerity program. On the flip side, the Eurogroup is insistent that Greece must respect the rules. After all, they signed a memorandum in 2012 promising to implement the IMF austerity program in full.
Without access to additional bailout loans, Greece will have no option but to default on its debt payments. Once this happens, many Greek banks will become insolvent since they own Greek bonds as reserves. And if the banks are unable to lend, then credit will be driven up, forcing many businesses to shut down. So, I expect that Greece will experience a sharp contraction if it exits the Eurozone.
But, there will be no contagion. The Greek economy is about 1 percent of the Eurozone. And, about 80% of Greek debt is held by public institutions such as the IMF and central banks. So, in the end, it will be the non-Greek taxpayers who will incur losses.
If the Greek exit plays out, the dollar will benefit further from safe-haven flows. Stay tuned.
EUR-USD dipped yesterday. ECB Policy Maker Nowotny said he did not expect a deal on the Greek bailout. There are no major economic news or events scheduled for today. That said, I will be closely monitoring the ongoing drama. More to come later this week on our blog.
GBP-USD is trading sideways ahead of the publication of the Bank of England’s monetary policy meeting minutes. Aided by low gas prices and improving fundamentals, most analysts now expect the economy to expand by 2.8% this year.
USD-CAD is stuck in narrow ranges. Bank of Canada Governor Poloz highlighted the widening gap in output and downplayed a strong pickup in consumer prices in March as transitory. This suggests that another rate cut is not off the table.
AUD-USD fell overnight as traders speculated that the Reserve Bank might not refrain from cutting the overnight rate in May. The Bank’s March meeting minutes will be released today. I expect the minutes to read dovish, and the currency pair to make new trend lows.
Have a great Tuesday!