BNP Paribas assess the FX response to this weekend's Greek referendum, outlining the potential EUR response to a Yes/No vote and along with the best EUR trade to position for such an event.
"We continue to believe that good news on Greece represents bad news for the EUR.
The ECB's quantitative easing programme (QE) is the key factor driving
down the EUR, as the single currency is used as the key funding currency
for FX carry trades. EURUSD is overvalued versus 2y rate spreads.
Disappointing headlines on Greece produce a risk-off approach in
markets that results in the unwinding of carry trades and buying back of
the EUR. We believe this logic will remain in place around Sunday's referendum," BNPP argues.
EUR response to a Yes/No note.
"A 'yes' outcome should produce a relief rally in markets
and encourage investors to again add to EUR-funded carry trades. This
will drive the EUR lower. In contrast, a 'no' outcome may produce new
risk reduction and a further unwinding of EUR shorts," BNPP projects.
EUR positioning into the referendum.
"Our BNP Paribas Indicator reports short EUR exposure at -14
(on our scale of -50 to 50), which is a moderate short but well below
the trough of -35 in January. This logic on FX is supported by
the relationship with peripheral spreads during the latest round of
Greek negotiations since February. The FX interpretation is also
consistent with our anticipated response by the eurozone peripheral bond
market, including an overshoot in the immediate aftermath of the
referendum," BNPP notes.
How to play it? Sell EUR/JPY.
"A short EURJPY position also includes an element of a tail-risk hedge.
Like EURUSD, EURJPY appears significantly overvalued according to 2y
real rate spreads. A surprise 'no' vote would likely cause a sharp
risk-off event similar to that of Monday morning (29 June). In this
situation the EUR would drop sharply and the JPY would benefit as a safe
haven, especially as the market is not currently running a net long JPY
exposure," BNPP advises.
