NSF - A Greek Tragedy

The correction in the USD index continues as Friday’s US nonfarm payroll showed that job growth collapsed to its worst level since December 2013. The US economy created only 126K jobs last month, which was significantly less than the 250K that was forecast. The report broke a streak of 12 straight 200,000-plus gains and employment gains for February and January were reduced by a combined 69K. The unemployment rate was unchanged at 5.5% while the labor-force participation rate fell to 62.7%, matching the lowest level in 37 years, as 96,000 Americans dropped out of the labor force in March. All in all, the disappointing report makes it more likely that the Federal Reserve will wait until the end of summer before raising interest rates for the first time since 2006. The news weighed heavily on the USD on Friday causing it to underperform against all the major currencies except one, the AUD.

Fundamentally, the USD will continue to be well supported by the dominate theme of the divergence of monetary policy between the Fed and the rest of the global central banks. The chart technical warns us that the USD has more room to correct in the short term. The daily chart of the US dollar index shows that the 5-day moving average remains below the 20-day moving average and that the momentum indicators have not found a bottom yet.

 

Over the next couple of weeks, Greece will dominate the headlines as it may not have enough cash to meet its debt obligations. Greece does not have the funds to repay €450m to the IMF on April 9 and also to cover payments for salaries and social security on April 14, unless the Eurozone agrees to disburse the next tranche of its interim bail-out deal in time. We assume that faced with a choice between a default to the IMF and a default to their people that the government will choose to not repay the IMF. If this happens it will be the first time a developed country has ever defaulted to the IMF. While the IMF will probably offer a short grace period before declaring Greece to be in technical default, Greece has other really big funding hurdles to face.

Greece also has Treasury bills totaling €2.4 billion that mature on April 14 and April 17. Most of this debt is sitting in Greek banks, which have been rolling over these bills with emergency funding obtained from the ECB, rather than demanding repayment from the Greek government. However, these two upcoming bills are different because at least €500 million is owed to investors outside Greece who are going to ask for their money back. This is where things could spin out of control – if Greece can’t pay, it would be a default. This would trigger clauses in Greece’s other debt obligations that would require immediate repayment of those debts as well. This has the potential to sends shockwaves around the globe, the ECB, and the remaining depositors in Greek banks.
Keep in mind that this would be similar to what happened in Cyprus as the ECB will force "bail-ins" on the depositors of Greek banks in order for the ECB to recover what is owed to them. We bring this up to demonstrate that Cyprus remains in the euro so it doesn’t necessarily mean that Greece will be kicked out of the Eurozone. However, Greece may choose to leave on its own accord or may be asked to leave by

the remaining members. Either way, the effects on the euro are uncertain to say the least. Initially, the knee jerk reaction will be to sell the euro but it could rise after the fact as markets deem the Eurozone to be stronger without its weakest link.