The EURUSD is going to have a volatile and uncertain year. In our global scenario, we still thinking that the USD would be less stronger than anticipated by the consensus. However, due to the high level of uncertainties surrounding 2017, we would like to highlight a risk out of the market radar: the Greeks’s spectre.
The U.S. uncertainties
The unclear fiscal and budgetary policy in U.S. is a challenging element for any currency analyst. The new administration has pledged for a weaker dollar, but most of the measures proposed are a recipe for a strong dollar. If such policy would materialise, it could push the FED to act quicker than expected and increase the interest rate differential between the Euro area and the U.S. implying a rise in the hedging’s cost. At the moment, the market is anticipating 65 bp increase by the Central Bank in 2017, but if inflationary pressure materialised, we would not be surprised to have 100 or 125 increases. It is not our primary scenario, but the risk has to be priced.
The ECB position
In Europe, the ECB monetary policy is clear and set for the year. The Easy quantitative program will continue until December 2017 at the pace of 60 billion bond purchase each month bringing the Central Bank balance’s sheet close to 25% of the Eurozone GDP. Likely, the EQ program would be extended the first part of 2018 before stopping. It does not mean, the ECB will start a normalisation process, and we are not expected to see any increase in interest rates before Q2 2019.
A busy political agenda
In the meantime, the political agenda in Europe and the different potential issues are numerous, challenging and uncertain. The most important political issue will come from France where we believe the extreme right party has some changes to at least perturb the pools. If Madame Lepen, by any chance, would win the election, the euro area as we know it, will disappear. The potential election in Italy and eventually in Spain also are a concern. The case of Catalogna independence is entirely out of the market radar, but it remains very well alive.
The Greek case
Finally, Greece could be the next trigger for a European crisis. One deadline is looming in July when Greece’s monthly debt repayments will increase to about 8 billion euros.
At the moment, Greece is caught in a spat between its major creditors. On one side is the International Monetary Fund, which says significant debt relief is needed. On the other are the Eurozone institutions, insisting on a primary budget surplus of 3.5 percent of GDP and no further relief. With both sides in fundamental disagreement, it’s hard to see how a compromise can be engineered. Clearly, Greece did not fill its current obligation, and surely Greece will not be able to support a repayments increase in July. The country will need a new loan (financing needs represents 62% of GDP) as debt will reach 181% of GDP in 2017. Greece has never been a financial issue for Europe, but after the Brexit, it is going to become a huge political challenge for the Euro area again.
Impact for our portfolios
The Greek case and the potential Grexit could affect our performance positively, sending the EUR to hell versus USD. But likely, the uncertainties and perception would end to a more fundamental view: the Euro-area is stronger without Greece and Greece needs to go out to rebuild its competitiveness.