The Greek Drama Continues

BBH CurrencyView

• Dollar, yen and Swiss franc are trading firmer; US economic data likely to further stabilize
• Moody’s placed three major French banks on negative outlook; EUR/USD trades below $1.43
• Hungary CPI surprises to the downside ahead of CB meeting; Chile’s CB raised rates by 25bps

The US dollar, yen and Swiss franc are trading firmer as the impasse on the new Greek aid package unnerved traders ahead of the next IMF tranche due later on in the month. The euro also traded lower, dropping nearly 0.9%, in part from the news that Moody’s put three French banks on credit watch due to their exposure to Greece (although the euro appears to have stabilized around $1.43 following the good results from Portugal’s debt auction). Sterling is bogged down by a rise in the U.K. claimant count and weak average earnings, which reinforced BoE policy doves. The Swiss franc, meanwhile, benefited from deleveraging of risky positions even though tomorrow’s SNB policy review is likely to show that the SNB is hesitant about signaling a change in its policy stance. Elsewhere, the Australian dollar held up around $1.068 after hawkish rhetoric from RBA Governor Stevens in Asia. The ongoing Greek crisis soured the mood in equities, with global stocks declining following the Moody’s actions overnight. Asian stocks were broadly lower, while the Euro Stoxx 600 slipped 0.1% led by 0.7% losses in financials. The reversal of risk appetite has pushed bund and gilt futures higher, with bunds outperforming on safe haven flows.

The markets remains stuck in a tug of war between global cyclical sentiment and the risk of disorderly Greek default as the key drivers of FX. On the one hand better performance by US economic data and to a lesser extend China will go some ways to reshaping the markets propensity for taking risk. On the other hand, regardless of the economic data fears stemming from the growing uncertainty over the fallout from Greece in the short-term are likely to outweigh economic fundamentals as contagion fears are likely to spread. Not to mention it is still possible that economic data underperforms the market’s expectations, which would likely exacerbate risk appetite further still. In the same way, Moody’s put three French banks on review for downgrade due to its exposure to Greece, which is likely to fuel anxiety over other sector exposure to Greece after it said it could take similar actions on other banks with direct exposure in the coming weeks if it considers ratings inconsistent with the potential impact of a default or restructuring. Adding to the fears of a potential disorderly Greek default, Greece’s socialist MP rejected the austerity plan, while Greek unions stage a 24-hour protest. That now leaves the government with a majority of four and more importantly questions the political will to pass the medium-term fiscal strategy, which is necessary to keep Greece afloat through external loans. Such a event, or really the expectations of one, if and when others dissent, are euro negative directly and through the interest rate channel as more funds flow into the German short-end, narrowing the relative 2-year spread between Germany and the US. Altogether, we suspect that the uncertainty over Greek has the potential to continue to weigh on the euro in the short-term with a downside break of $1.4285 opening the door to test levels near $1.42, which as a result is also likely to keep CHF bid.

EUR/HUF is up almost 0.5% and front end rates fell sharply in Hungary today after the release of a much lower-than-expected CPI print. With CPI at 3.9% yoy, we are not yet at the point of discussing cuts, but we expect to see many of the economic indicators starting to peak as a result of the recent policies enacted by the Fidesz government, especially the bank and industry taxes. The number strengthens our view that the next move by the central bank will be a cut. The Monetary Council, with its new members, does not seem to have reduced its concern about inflation and indeed its language has remained quite conservative on this front. Nevertheless, the central bank meets next Monday and we expect that aside from holding rates at 6.0%, the statement will bring some dovish language. Similarly, the statement by the Chilean central bank yesterday was in line with our dovish central bank watch. The bank increased rates by 25bps to 5.25% and signaled more tightening, all as expected, but the statement brought some interesting changes to its international outlook section. It removed the reference to elevated commodity prices and rising global inflation, leaving only the more dovish reference to the risks associated with the slowdown in growth in developed economies and financial risks in Europe. We suspect that forthcoming central bank meetings, including that Reserve Bank of India tomorrow and the central bank of Colombia on Friday will show a similar dovish language, even though both are likely to hike rates by 25bps.