Buy or Sell Euros after Greek Referendum?

Trading tactics become extremely important when it comes to managing positions ahead of major event risks like this weekend's Greek referendum. The referendum may be a yes/no vote on the bailout package but it is also an indirect in/out vote on the euro.  Few Greeks truly understand the economic and social consequences of this vote and how more trouble will follow regardless of the outcome.  A no vote could lead to a Grexit and a yes vote could mean the resignation of Prime Minister Tsipras along with snap elections.  Either way, the one absolute certainty is volatility. When the currency market opened for trading last Sunday, EUR/USD gapped 200 pips lower with similar moves seen in other major currencies.  Given the significance of the referendum, we expect the same if not a larger reaction this weekend.  U.S. markets are closed on Friday in observation of the July 4th holiday but other markets including currencies are open for trading so the smartest tactic is to go flat ahead of the weekend. Unless you are willing to stomach very wide stops, trading the Greek referendum proactively is extremely dangerous.  Even if you handicap the vote correctly, the expected volatility could shake out your trades before it moves in the desired direction.  Laying out orders above or below the market is also risky because brokers will fill your trade at unfavorable prices if there is a gap.

 However after the referendum, we will be looking to sell euros REGARDLESS of the outcome and here's why.

 #1 No Vote - The messiest scenario is if voters reject the referendum. The Greek financial system would collapse and almost immediately investors will question the unity of the euro. Even if a Grexit is long term positive for the monetary union, in the short term, the fear of a Grexit could lead to a multi-day decline in the EUR/USD that takes the currency pair below 1.08. While PM Tsipras will try to use this as leverage to negotiate a new deal with creditors, too many bridges have been burned and in all likelihood there will be no deal and Greece will be pushed out of the euro.  In this scenario, we will be looking to sell the EUR/USD on any rally for an eventual target of 1.05.

#2 Yes Vote - A yes vote is just as complicated because it would deepen the political crisis before alleviating the financial one. Tspiras and Varioufakis pledged to resign if voters vote yes which would lead to new elections.  Of course given the track record of the Greek government, we would not be surprised if Tsipras decided to remain in office for the sake of executing the people's demands by negotiating a new deal.  The question then becomes whether or not Greece and its creditors can agree to a new deal before July 20th, when Greece owes the ECB 3.5 billion euros. A yes vote is encouraging but it does not remove all of the uncertainties and because of that we still think rallies in the EUR/USD should be faded until July 20th.  However pricing is key because the EUR/USD will jump on a Yes vote.  We will be looking to sell euros between 1.1350 and 1.1550 and not anywhere lower unless the vote is NO.  

Dollar - Non Farm Payrolls Take Backseat to Greek Crisis

There was very little consistency in the performance of the U.S. dollar today, which confirms that investors are laser focused on this weekend's Greek crisis. U.S. companies added 223,000 jobs in the month of June, pushing the unemployment rate down to 5.3%. While encouraging this improvement in the jobless rate also reflects a sharp decline in participation. The labor force participation rate fell to 62.6%, the lowest level since 1977 while average hourly earnings growth stagnated.  The dollar fell on this report but its losses were limited as investors minimize exposure going into the holiday weekend and the Greek referendum. While Janet Yellen said wage growth is not a prerequisite to near term rate hikes, there's no doubt in our minds that the chance of tightening in September has fallen after today's report.  Whether a tightening in the fall is off the table hinges on the Greek crisis and its impact on the global markets. Central banks around the world are getting nervous. This morning the Swedish Central Bank surprised the market with rate cut and more actions could follow in other parts of the world if the Greeks vote NO on Sunday.  We are still looking for the dollar to trade as a safe haven currency and a no vote would drive the greenback higher against all of the major currencies except for the Japanese Yen.  After today's softer employment report, a rejection of the Greek referendum would be a double blow that could send USD/JPY below 122.

Sterling Hangs Tight Ahead of PMI Services

Amidst mixed economic reports, sterling ended the day unchanged against the U.S. dollar and slightly lower versus the euro.  Construction sector activity accelerated in the month of June but house prices fell 0.2% which was a big surprise considering that economists were looking for prices to rise by 0.5%. So far, we've seen weakness in manufacturing and improvements in construction - the deciding factor will be tomorrow service sector report. The uptick in consumer confidence, rebound in retail sales and rise in average weekly earnings means the chance of an upside surprise.  Meanwhile the U.K. may come out on top from the Greek crisis. Not only is the country a beneficiary of inflows but British banks have nominal exposure to Greece. According to the Economist, their exposure is worth less than 1% of the value of their equity capital. "British banks' exposures to the likes of Italy, Spain and Portugal amount to 60% of their equity capital. But, unlike when Greece was last under threat in 2012, contagion seems improbable. Indeed, stronger growth in Europe has been contributing to an increase in financial stability, says the report.  Without contagion, that should continue." With this in mind, risk aversion could still drive the FTSE lower and lead to near term losses for U.K. assets.

AUD and NZD Hit Hard by Chinese Weakness

The Australian and New Zealand dollars extended their losses versus the greenback today.  For the fourth consecutive day, NZD/USD has made fresh 4.5 year lows.  While risk aversion dominated the moves, there was no help from economic data.  Australia's trade deficit narrowed but not as much as economists had anticipated while commodity prices in New Zealand continued to fall.  The persistent weakness of NZD/USD reflects the market's expectations for a rate cut this month.  PMI services and retail sales are scheduled for release from Australia. Given the drop in the PMI manufacturing index, we are looking for a downward surprise that could accelerate the losses in AUD/USD.  China's HSBC Composite and Services PMI indices are also scheduled for release. While these reports are interesting, the focus is on Chinese stocks. If the Shanghai Composite continues to fall, AUD and NZD will come under additional selling pressure. USD/CAD on the other hand retraced as oil prices recovered.