Euro falling on Greece sends volatility climbing most since 2008
The euro slid more than 1 percent, boosting volatility by the most since the 2008 global financial crisis, after Greece moved a step closer to leaving the currency bloc by effectively asking voters to decide on its membership.
The yen strengthened against all 31 of its major counterparts as investors sought havens. Greek Prime Minister Alexis Tsipras rejected creditors’ latest aid proposals on Friday, calling a referendum on them for July 5 and saying he would advocate a “no” vote. With cash flooding out of banks at a record pace and the bailout expiring Tuesday, Greece will shut lenders Monday.
“It’s risk off across the board,” said Stan Shamu, a Melbourne-based strategist at IG Ltd. “Everyone’s a little bit nervous ahead of this referendum. Traders are unwilling to support the euro at lower levels and potentially there will be further losses in the near term.”
The euro tumbled 1.4 percent to $1.1010 as of 6:40 a.m. in London after sliding as much as 1.9 percent to $1.0955, the lowest since June 2. It reached a 12-year low of $1.0458 in March. The yen jumped 1.2 percent to 122.35 per dollar, and surged 2.7 percent to 134.73 per euro.
Implied one-month volatility for euro-dollar trading rose as much 3.54 percentage points to to 15.32 percent, from 11.78 on Friday. The measure reached as high as 18.42 percent in September 2011.
ECB Toolkit
European Central Bank President Mario Draghi convened his Governing Council on Sunday for an extraordinary meeting, at which it froze the level of emergency aid available to Greek banks. Greece moved to avert the collapse of its financial system by shutting lenders and imposing capital controls as of Monday.
“It’s basically euro selling and buying of dollar and yen but there is still the possibility of Greece giving up before the referendum,” said Yuji Saito, director of foreign exchange in Tokyo at Credit Agricole SA. “Greece hasn’t defaulted yet and there will still be twists and turns. Anything can happen in the next two days.”
German Chancellor Angela Merkel spoke to President Barack Obama on Sunday, agreeing on the importance of keeping Greece in the euro. In telephone calls on Saturday, U.S. Treasury Secretary Jacob J. Lew urged creditors to find a sustainable solution.
Clean Shorts
Before the referendum announcement, hedge funds and other large speculators added to bets the euro will weaken to 99,306 contracts in the week ended June 23, the first increase this month, from 89,357 the week before, according to the Commodity Futures Trading Commission. Bearish bets dropped in the week ended June 16 to the least since July 2014.
“Positioning is the cleanest it has been in nearly a year, making the types of position-clearing moves we saw the other week when EUR squeezed higher to 1.14 unlikely to be repeated,” Jens Nordvig, managing director of currency research at Nomura Holdings Inc. in New York, wrote in a June 28 note to clients.
The ECB is already pumping 60 billion euros ($66 billion) into the financial system each month, weighing on the currency. The euro has weakened 9 percent against the dollar this year, after a 12 percent decline in 2014.
Greek Referendum
Mohamed El-Erian, chief economic adviser at Allianz SE, said markets will be looking to the ECB for measures to contain the crisis.
“There’s an 85 percent probability that Greece will be forced to leave the euro zone” in the next few weeks, El-Erian, who is also a Bloomberg View columnist, said in an interview from New York.
Greece’s population may still vote “yes” in the referendum, and find a way to keep the nation inside the currency bloc. Its current aid program expires on June 30, the same day it’s due to make a payment of $1.7 billion to the International Monetary Fund.
The referendum “is effectively a vote on remaining inside the eurozone and the euro falling almost two cents immediately this morning tells you the market is not hedged for such a scenario,” said Imre Speizer, senior market strategist at Westpac Banking Corp in Auckland.
Falling Asian stocks sparked led to risk aversion among some investors, boosting the demand for the yen, Credit Agricole’s Saito said.
The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, added 0.4 percent to 1,184.70.
A stronger dollar would enhance the scope for a delay in the timing of a rate increase by the Federal Reserve, Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, wrote in e-mail earlier on Monday.
[Bloomberg]
