'Markets less worried about Greece than 2012, but Grexit could cause knee-jerk reaction' - Ilya Spivak, DailyFX

   Ilya
Spivak

PROFILE:
• Current Job:  Currency Analyst at DailyFX.
• Career: He holds degrees in Economics and International Relations from the University of California.

View profile at FXStreet

Ilya Spivak applies a global macro approach his analysis, taking a longer-term view on investing in the G10 currencies that often incorporates cross-market relationships and geopolitics. Ilya’s research has appeared on CNN Money, Reuters and Bloomberg News. Before DailyFX, Ilya spent a number of years in FX Sales and as a Researcher at the Center for International Trade Development. He holds degrees in Economics and International Relations from the University of California. Ilya authors a number of regular articles for DailyFX.com.

The bund sell-off is driving the German bonds yields skyrocketing above 1.0%, having surged around 50% since last week; How is it affecting the currency market?

The Bund’s decline has played out parallel to a drop in Greek bond yields as well as an upswing in the Euro, suggesting the move has reflected ebbing worries about Athens’ ability to strike a deal with EU/ECB/IMF creditors. Not surprisingly, diminishing “Grexit” fears undermine demand for German government bonds, a regional safe-haven.

BoJ Governor Kuroda said that it is hard to see the Yen's real effective exchange rate falling further; Do you see the end of the Yen weakness days? What is your take in the USDJPY?

The Yen looks likely to strengthen in the near term, particularly if bets on a sooner-than-expected Fed interest rate hike fuel risk aversion and trigger unwinding of JPY-funded carry trades. Kuroda’s comments certainly help as well, in that they hint the BOJ is in no hurry to expand stimulus. The long-term USDJPY uptrend is likely to resume thereafter however as policy divergence returns to dominate price action.

The US Dollar is trading down this week and even giving up all its post-NFP gains; Do you think it is a temporal weakness or do you expect more losses in the short term?

The prospects for renewed US Dollar gains hinge on the upcoming FOMC policy announcement. If Yellen and company hint a rate hike is due sooner than the markets’ consensus outlook placing tightening in October – as I expected will be the case – the greenback will probably launch upward anew.

The EUR seems to be ignoring the Greek Tragedy lately. Do you think that will continue? Could the EUR ignore a hypothetical Grexit?

The markets seem less worried about Greece because – compared with 2012 – the fallout from a default would be relatively contained. This is because most of what Greece’s debt is now owed to EU institutions and the IMF. These players won’t go scrambling for cash like private market participants in the event that they have to write off Greece-related losses, largely averting a Lehman-like scenario. The pain inflicted on Greece in a disorderly redenomination scenario may also discourage other countries from following suit, perversely bolstering the EU’s structural integrity. Still, the unprecedented nature of a “Grexit” situation is likely to visit at least temporary losses on the Euro if only because traders fearful of uncertainty opt to dump regional assets as a knee-jerk reaction until the dust settles.

GBP/USD jumped above 1.5500 this week with talks about EU referendum. Do you think it is affecting the current British Pound price? Do you see further gains here or time to take profits?

A referendum on the UK’s membership in the EU is a very distant prospect and seems unlikely to be a meaningful near-term catalyst for Sterling. Renewed weakness seems likely ahead as markets digest hints at a mid-2016 BOE rate hike appearing in the latest Inflation Report, which clash with the markets’ priced-in bets on tightening by the first quarter of next year.

Who has the better hand in the bull-bear battle ongoing on the Oil market?

Sellers will probably prevail. Data from the Energy Intelligence Group suggests global oil supply is outstripping demand by the largest margin in 17 years. That suggests the recovery over recent months has been corrective in the context of a larger down trend.