Its election time in Greece. I’ll start out by saying that so far, the best piece of commentary I have seen was from a Bloomberg video “Here’s What Happens If Greece Leaves the Euro.” In just over a minute the video quickly surmises the pain that Greece will feel if it retruns to the drachma. Its financial system will be paralyzed, inflation rises, and lots of unanswered questions will follow. However, the video ends with the realization that at the end, a devalued drachma could just be what Greece needs to finally turn itself around. Overall, regardless of the election, all paths appear to point to Greece leaving the Euro, however it’s all a matter of when.
Debating how the election will unfold is too hard at this point. However, we can prepare ourselves for Monday's action in the EURUSD following the election. The question is whether there really can be a favorable outcome for the EURUSD after the election. It could be that regardless of the outcome, the EURUSD could be poised to trade lower on Monday after its initial gap higher or lower.
If Syriza wins, than they would command a greater bailout to stay in the EU. At that point, it would be in the EU’s hands to decide where to go with Greece, and frankly, unlike Spain, Greece doesn’t appear to have much leverage at this point. Non Greece banks have been creating contingency plans for a Grexit for months already. As such, the fear of a Greece triggered financial lock has been reduced for the rest of the EU.
If the Pro-Bailout guys win, than we would probably see a pop in the EURUSD as a result. Nonetheless, even if they got the votes to create a coalition the gains could be limited as focus will quickly return towards Spain and Italy. Both of those countries are seeing their Sovereign Debt yields surge higher in the last two days. As such, without the boost of short covering and rumors of central bank liquidity going into the elections, we could easily see selling pressure return next week.
As such, the probabilities of a “Sell on the News” play in the EURUSD remain high. We could either see the EURUSD pop higher on positive Greek news on Monday, only to fall. Or, if the EURUSD opens lower it could see continued selling pressure throughout next week.