FXStreet (Bali) – John Normand, FX Strategist at JPMorgan, writes that a ‘Grexit’ could be worth 5 to 10 cents of maximum downside on EUR/USD during this crisis should contagion require the ECB to exand its balance sheet materially.
Key Quotes
“Although a climb-down by either Greek or European politicians could keep Greece within EMU, the odds of such an epiphany seem sufficiently low that we use euro exit as the base case and reiterate targets for EUR/USD, volatility and a possible successor currency we’re calling the GReuro.”
“Greek EMU exit could be worth 5 to 10 cents of maximum downside on EUR/USD during this crisis, but only if contagion requires the ECB to upsize its balance sheet materially.”
“Since investors and corporates have so little exposure to Greece, the country’s exit only weakens the euro if market participants price exit scenarios into other European assets and the ECB needs to increase its balance sheet materially to offset this stress. Every €500bn of ECB balance sheet is worth five cents downside if the Fed is tightening at the same time.”
“The 5 to 10-cent maximum downside assumes that the ECB might require an additional €500bn-€1trn programme to contain stress, but this is quite an aggressive target. Recall that the ECB already intends to increase its asset base by about €800bn anyway over the next year (to €3.3trn) as part of its QE, and even if those bond purchases and repos were not intended to contain sovereign stress, they will have that effect nonetheless.”
“There is no change to the year-end EUR/USD forecast of 1.05. To us, Fed policy will be more enduring than sovereign stress, and we doubt the stress will require such a large ECB commitment to deliver the extreme downside targets outlined above. Hence, no change the forecast decline to 1.05 this year (based on the Fed) and a bottom in Q2 2016 (based on ECB tapering). “
(Market News Provided by FXstreet)