The second Greek election, coming Sunday the 17th of June, has been portrayed as a referendum on the Greek membership in the euro. The election results will remain unknown until after the polls close on Sunday, and even polls of the anticipated results are now illegal. The parties who were signatories to the bail out memorandum, the New Democracy and the Pasok Parties have been under attack from the Syriza Party. Alexis Tsipras, leader of the Syriza party, though he slams the bail out, now vows to stay in the euro.
With the many different parties, there is bound to be confusion, as the groups attempt to patch together a governing coalition. About 80% of what Greece consumes is imported. Confronted with the potential chaotic world where payment for everything would be made with a cheaper currency is a frightening alternative. It looks like Greece will opt to remain in the euro.
This assumes the EU wants Greece to remain, but it appears unlikely there is any leader or group of leaders, who are decisive enough to expel the Greeks. Besides the EU leaders have major problems with the Spanish and Italian debt issues, and do not wish to have a messy exit by the Greeks.
Only days after a €100B rescue package was given to recapitalize the Spanish Banks, the Spanish 10-year rate soared to 7%. The monies, supposedly loaned to Spain at 3% for 10 years, will in part be coming from Italy which is now paying over 6% to borrow money. Further the private loan money appears to be drying up, at a time when the ECB, heeding the desires of Germany, is not expanding its money supply.
In the Telegraph today Ambrose Evans-Pritchard reported:
"We're facing maximum tension. The situation is unsustainable over time," said the country's finance minister Luis de Guindos. Yields on 10-year Spanish bonds yields punched to almost 7pc, above levels that triggered ECB intervention to back stop Spain last November. "The ECB needs to intervene very quickly or it is game over," said Nicholas Spiro from Spiro Sovereign Strategy. "There is a whiff of capitulation in the air."
Perhaps there are some traders ready to throw in the towel, but this train wreck is no surprise. If we look at last week's COT report, speculators are already short record amounts of the euro and the SF, which is tied by the SNB to the euro. For the past several days, the EURUSD has been trading like there are some USD longs that may want out of the market.
Recent numbers coming from the US indicates the recovery might be slowing and the bounce in the employment rate is over. FOMC Committee Notes and a press conference will be forthcoming on the 20th. It may be premature, but the market is starting to warm up to the idea some sort of stimulant package may be pending, a product of the Bernanke Yellen combine. Failing monetary expansion in Europe, USD expansion alone would be bearish for the USD, especially when there are so many longs.
Looming in the background are judicial decisions and potential political events that can have a longer term impact on the USD. The Supreme Count's decision about the constitutionally of Obamacare will soon be forthcoming. A legal review by the Supreme Court over laws passed by Congress was determined in a landmark case, Marbury v Madison, in 1803. Should a portion or all of Obamacare be judged unconstitutional this is probably longer term friendly to the USD.
Why? Job creation during this recovery has been terrible, and one of the reasons is the demand of medical care for new employees assigned to small business under this complicated and confusing law. Most new hires during a business recovery are done by small business, and this expansion has in part failed to occur, because of the unknown expenses of the new law.
Further if the employer fears medical and other regulatory costs will be too high, the new jobs are moved off shore. The US has a 39% tax rate, the highest corporate tax rate in the world. It is another major reason entrepreneurs are watching carefully for change which might favor remaining in the US.
To summarize, there are several issues which may keep the volatility in the USD and the euro. In Europe, we have an unresolved debt mess, which lacks leadership and vision needed to solve. Compounding the many problems is a slowing global economy which seems like we are headed toward another recession. Finally, lurking in the background, are some changes in the US regulatory and fiscal atmosphere which may tilt the advantage back toward the US.