Contagion Contained as Euro Rebounds Post-Greek Elections
- EURUSD hits fresh 11-year low below $1.1100 before rebounding.
- Non-EUR: NZDUSD looks vulnerable w/ FOMC, RBNZ on Weds.
- See the DailyFX Economic Calendar for Monday, January 26, 2015.
One can't help but think that part of the ECB's motivation to get its QE program off the ground last week was to buffer financial markets in case of fallout surrounding the Greek elections. For proponents of the supranational European body, the results were a definite blow: the far-left, anti-bailout Syriza party nearly won an outright majority; instead, a coalition with the right-wing, anti-bailout ANEL party was formed, ushering in a contentious era of relations between Greece and the rest of the Euro-Zone.
For now, market participants are treating the Greek results as a Greek problem, not a Euro-Zone one While the 10-year Greek bond yield jumped around +47-bps at the time of writing, the Italian and Spanish equivalents were relatively unchanged around +1-bps each. Contagion has been contained thus far, giving the Euro some breathing room to scrape back its opening print losses, having established a fresh 11-year low under $1.1100 shortly after markets opened on Sunday.
That being said, with Greece's government taking the 'no to austerity, yes to debt reduction' approach, this week's Eurogroup meetings carry a bit more weight than they have at any point over the last several months. Policymakers are walking a definite tightrope.
On one hand, while Greece's incoming leadership has said it wants to remain in the Euro-Zone, it doesn't want to maintain its membership under the current pretenses. On the other, the Northern creditor bloc doesn't want to secede debt forgiveness: if Greece can reduce its burden, why couldn't Italy or Spain make the same demands? The worst case scenario would be if Germany et al. handled Greece the way that the FDIC handled the collapse of WaMu - a new precedent that made it difficult to distinguish the illiquid from the insolvent, the viable from the vile.
See the above video from technical considerations in EURUSD, EURGBP, GBPUSD, GBPCAD, and NZDUSD.
--- Written by Christopher Vecchio, Currency Strategist
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