Trading The Greek Debt Talks
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FX: How to Trade Greek Debt Deal Talks
The ongoing negotiations between Greece and her creditors are driving euro traders crazy. One day of progress is followed by another day of setbacks. This back and forth is keeping euro traders on their toes and EUR/USD in a range. While we ended the week with more willingness to compromise between German Chancellor Merkel and Greek Prime Minister Tsipras, the talks will remain in focus on Monday with Eurozone Finance Ministers meeting again to talk about Greece. We know that Germany is open to changing some bailout terms and Greece is willing to keep approximately 70% of the current bailout package. So the main task is to try to agree on the remaining 30% of the package. It is essential that progress is made at next week's meeting because Greece is running out of time since the current bailout program ends on February 28. Greek leaders are motivated because according to local media, nearly all of the liquidity available has been absorbed, making it extremely important for the country to look for financing options. While some economists believe that the risk of a Grexit increases with each passing day, we believe that in the next 2 weeks, Greece will ask for an extension and that is where the trading opportunity lies.
For FX traders, there are 2 ways to trade the Greek debt negotiations. You can bet on the talks breaking down and Greece leaving the euro, which is a risky trade because the chance is low and euro short positions are overstretched. However the payoff would be huge because a Greek withdrawal from the Eurozone would immediately set expectations for other countries leaving and eventually the dissolution of the euro. If this were to occur, EUR/USD would break through 1.10 quickly on its way toward parity. Yet the higher probability opportunity is to buy euros on a dip if the currency pair comes into the 1.1250 to 1.1350 range or on a break of 1.1450, which should not occur unless there is clear progress in the talks. The outcome of the Greek debt negotiations not only impacts the euro but all major and minor currencies. If a deal is not made, safe-haven currencies like the dollar and yen will outperform, high-beta currencies will fall and emerging-market currencies will sell off while a deal will lead to profit taking in the greenback and gains for many currencies. An agreement can be reached if Greece is willing to commit to significant reforms and Europe is willing to award them with gradual debt write-downs.
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