10 Jul 2015
Greece deal likely, EUR/USD expected at parity by 2015-end – ING
FXStreet (Barcelona) - Chris Turner of ING, shares their base case scenario, expecting a Greece deal likely, and further sees the Fed hiking rates in September which will drag EUR/USD lower towards 1.00 by year-end.
Key Quotes
“The increased chance of a Grexit has many questioning its lasting impact on the EUR. For example, would a Grexit remove a weak link in the Eurozone, discourage like-minded politicians elsewhere (eg, Spain) and provide greater confidence in the sustainability of EMU? We do have some sympathy with these arguments, but on balance expect the increased chance of a Grexit to hit EUR/USD through two channels.”
“The first would be an extra risk premium required of the EUR for national currency redenomination risk. The second would be the more familiar macro-monetary channel. This would see the ECB respond to the tighter financial conditions of wider credit spreads and lower equities with more front-loaded and larger QE. Unlike typical financial crises we doubt the EUR would benefit from de-leveraging by the Eurozone financial sector, since this sector has already de-leveraged after years of crisis and especially in the run up to the ECB’s Asset Quality Review conducted in late 2014.”
“A Grexit is the alternative scenario and is shared by the FX options market with the large negative skew of expected probabilities. Yet our baseline scenario is that a last-minute compromise can be reached.”
“Should this scenario play out, we look for the Fed to be in a position to hike rates in September and trigger our long-held view of a re-pricing at the short-end of the US interest rate curve. Typically the two-year segment of the US rate curve is one of the largest determinants of dollar pricing. And under our baseline scenario EUR/USD should drop to 1.00 by the end of the year.”
Key Quotes
“The increased chance of a Grexit has many questioning its lasting impact on the EUR. For example, would a Grexit remove a weak link in the Eurozone, discourage like-minded politicians elsewhere (eg, Spain) and provide greater confidence in the sustainability of EMU? We do have some sympathy with these arguments, but on balance expect the increased chance of a Grexit to hit EUR/USD through two channels.”
“The first would be an extra risk premium required of the EUR for national currency redenomination risk. The second would be the more familiar macro-monetary channel. This would see the ECB respond to the tighter financial conditions of wider credit spreads and lower equities with more front-loaded and larger QE. Unlike typical financial crises we doubt the EUR would benefit from de-leveraging by the Eurozone financial sector, since this sector has already de-leveraged after years of crisis and especially in the run up to the ECB’s Asset Quality Review conducted in late 2014.”
“A Grexit is the alternative scenario and is shared by the FX options market with the large negative skew of expected probabilities. Yet our baseline scenario is that a last-minute compromise can be reached.”
“Should this scenario play out, we look for the Fed to be in a position to hike rates in September and trigger our long-held view of a re-pricing at the short-end of the US interest rate curve. Typically the two-year segment of the US rate curve is one of the largest determinants of dollar pricing. And under our baseline scenario EUR/USD should drop to 1.00 by the end of the year.”