Tsipras Resigns
If this is a bad dream, then it is one that I am unable to wake from. A pinch has not done it, nor has a strong coffee so I guess this must be reality. The nightmare stems from the announcement yesterday that Greek PM Tsipras was to step down and elections would be called, with the vote taking place on September 20. We thought this possible, indeed probable, but there are certain things on which I would have been happy to be incorrect on and this would be one of them.
The near-term impact on the euro is very slight. With this week’s news that the German parliament and European Finance Ministers have voted through the latest Greek bailout package, immediate financing concerns are not an issue. Longer-term debt sustainability, of course, remains a very viable concern for all parties within the terms of the bailout, but bank funding and default has been taken off the table.
A Haven In The Euro
In fact, euro has continued to run higher in the past few sessions courtesy of further dollar and EM weakness. Dollar continued to be sold yesterday as the probability of a rate hike in September fell once again; markets are now pricing in a 32% chance that the FOMC will bring rates higher in less than four weeks’ time. Emerging-market currencies continued to get worked hard yesterday by commodity price declines and a general feel of unease following the movements of the Kazakh government yesterday.
Focus is now shifting to other currencies that have a hard peg to the USD and how long they can survive the strength of the greenback. Vultures are circling currencies like the Nigerian naira in particular; hammered by oil price declines and unable to weaken overtly in the short term.
Still The Biggest Risk Comes From The U.S.
Normalising monetary policy in the United States is only the latest starting pistol to be fired across FX markets this year but is a bigger risk to the world economy than Greece, the revaluation of the yuan and the collapse in oil markets in my opinion.
Previous hints at tighter monetary policy has caused spasms in emerging markets, slumped stocks and seen a rampant dollar. The economic climate has been made all the more opaque by the actions from the People’s Bank of China.
We are running a webinar on these risks next Wednesday morning. If you want to know what’s going on in USD markets you can sign up here.
China Going ‘Pop’
Overnight, the news has been all about China. The preliminary reading of manufacturing PMI from the Chinese industrial sector dropped to its lowest level since March 2009 this month. Following on from the data black hole that was July (weaker industrial output, retail sales and exports) this is an indication that further policy easing is coming and I would not rule out cuts to the Reserve Requirement Ratio and/or interest rates as soon as this weekend. Offshore markets are still pricing in an additional loosening of the yuan reference rate.
Focus through the European session will be PMIs from Europe as the markets try and forget Greece once again.