Will Greece leave the Eurozone?

Market have known about the Greek election for some time and a Syriza victory was long been predicted in various polls.

Source: Bloobmerg

This has not stopped traders from selling the EUR today, with currencies:EURUSD|EUR/USD] extending on the recent move lower and hitting a low of $1.1133 in early Asia trade. EUR/JPY has also been a favourite among traders to express a bearish bias and has lost over 12% since the 8 December peak. EUR/GBP has fallen for six consecutive weeks and, interestingly, we have not seen seven consecutive weeks of losses in this cross since the EUR was launched in 1999.

At the time of writing (09:30 AEST) Syriza had nearly 36% of the votes (equating to 149 seats), just shy of an outright majority. As mentioned, this outcome was always expected but the size of the victory (as it stands) is larger than expected. The key will be whether we see a full majority by the end of the day and, if not, whether the Syriza party can reach out to the smaller parties and form a coalition.

The bond market has not shown too much concern at all of late, partly as a result of the European Central Bank’s recent announcement of its €60 billion monthly purchase of public and private assets. Greek debt has actually been sought of late, while credit default swap spreads (which show the cost for institutions to hedge against bond default risk) have actually fallen in the last couple of weeks.

European equity markets could find sellers through the day and, while EUR/USD is grossly oversold (the 14-day RSI is currently at 16), European equities are overbought.

There is much for the market to work through with regards to the Greek situation. Recall that, while Syriza have promised the public it will renegotiate on its bailout terms, the majority of the Greek population want to remain in the monetary union. Very little of the outstanding Greek debt is held by foreign banks and, therefore, if we do end up seeing a restructure, Syriza would need to enter deep negotiations with the other Eurozone nations that hold the debt. Commentary of late has suggested there is once again strong political will to keep Greece in the monetary union, so it remains the markets’ base case that Greece will not exit.

Still, as we have seen so far in 2015, I think we should expect the unexpected. As a result, any rallies in EUR/USD look like good selling opportunities to me.

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