Greece Preparing for IMF Default

Daily Analysis - 30/06/2015

Government Intends to Miss Today’s Bundled IMF Repayment in First Stage of Default


As creditors bear down on Greece, the nation is increasingly cornered financially as evidenced by the bank closures and creeping social unrest. However, Greece has no intention to leave the Euro Area and is trying to stay a part of Europe no matter the cost.

Strategic Default Approaching

The massive EUR 1.70 billion repayment due to the IMF today will not be made according to Greek government officials, paving the way towards default on other obligations. Although it will not necessarily be deemed a default according to the IMF, it will place increased pressure on European policymakers to potentially return to the negotiating table as the rising costs of a Greek referendum could place the European Union’s credibility at risk. Meanwhile, as the Greeks enter day two of capital controls, the ECB has placed a cap on further Greek ELA distributions which could spell the end of any remaining solvency for Greek banks. However, the unfolding situation is proving a boon for the European Central Bank, paving the way for increased monetary accommodation with the Central Bank making preparations to expand the quantitative easing program to include other assets. European benchmarks plunged on the uncertainty, with the French CAC 40 giving up -3.74%.


US stocks stumble

Dragged down partially by external conditions and weakness during the European session, major American equity benchmarks slumped in one of the largest recent plunges.   Not helping matters was the downtick in pending home sales which missed expectations of 1.20% expansion, printing at 0.90% while the prior number was revised lower to 2.70% from 3.40%. The Dallas Federal Reserve Manufacturing Index also confirmed that progress in the real economy remains elusive after recording 6-straight months of contractionary prints. The stronger dollar is sapping foreign demand for US manufactured goods, putting the Federal Reserve in an increasingly difficult position as it reassesses the rate hike timeline in lieu of current events. Equities were led lower by losses in the Nasdaq Composite which fell -2.40%, followed by a -2.09% slide in the S&P 500 and -1.95% in the Dow Jones, putting the latter two in negative territory year-to-date.


Asia Bounces Back

Following the weakness that encircled capital markets yesterday, Asia has managed to bounce back in the overnight session, driven primarily by gains in the Shanghai Composite which has risen 5.10%. Increased monetary accommodation in the form of rate cuts and reserve ratio cuts are beginning to take hold although there is increased speculation that China will be forced to implement its own robust quantitative easing program. This comes after the Central Government embarked on a program to alleviate local governments of debt bearing exceedingly high interest rates, numbering approximately CNY 20-23 trillion according to estimates. While replacing existing debt with new debt is an effective refinancing, the expansion in the amount of outstanding debt will likely force the People’s Bank of China to soak up the additional liquidity through asset purchases, otherwise known as quantitative easing. Meanwhile, the Yen continues appreciate versus peers, with USDJPY slipping to just over 122.00.


EURCHF Ascending Triangle Technical Pattern

The Euro continues to slowly rebound after yesterday’s swift downturn ahead of today’s expected default. The EURCHF pair weakened to the point at which the Swiss National Bank directly intervened in the currency, selling the Franc and buying Euros to protect the economy vis-à-vis the exchange rate. Since then, the threat of further interventions and targeted soft-peg of 1.0500-1.1000 means that further upside is entirely possible in the pair. The ascending triangle pattern currently setting up in EURCHF has a bullish bias as the pair consolidates between a near-term uptrend and resistance sitting firmly at 1.0422. A move above resistance would be considered an upside breakout, expected to be accompanied by renewed momentum and volume. However, a move below the uptrend line could be viewed as a potential downside reversal.


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