Trading The Greece Crisis
Greece is a country in crisis whose spill-over effects are being felt far and wide. Millions of people have lost their jobs and are surviving on food rations. The government has sold key assets such as the national airport it built for billions of dollars. Thousands of people who bought expensive German cars have sold them for throwaway prices. Banks have been closed leading to loss of jobs. Bond yields are also in the negative. The country, which is in the mighty Eurozone is now poorer that most countries in Africa.
How the country got there
In 2001 Greece, a country that had long used the Drachma joined the Eurozone and adopted the Euro as the national currency. The drachma was forgotten. As a result of low interest rates, the country went on a buying spree. The country borrowed billions of Euros to support infrastructural projects. They build a railway project, a big airport, and thousands of kilometres of roads. Individuals took loans and bought expensive items such as the German vehicles and private jets. This led to high levels of inflation. At the time, the world was made to believe that Greece was the best investment destination. The party lasted for a very few years before the global recession that happened in 2008. During that time, Greece had accumulated debt, 180% more than the country’s GDP making it the poorest nation on earth. The country has been rated junk by all the major rating agencies such as Fitch, Moodys and S&P. The crisis has now subjected Greece to the risk of defaulting the IMF and loans to the Eurozone. If the country defaults, it will be forced to leave the Eurozone. It will also experience the worst recession in history. The credibility of the Euro will be put to question.
Why it matters
As a day trader, the happenings in Greece are very significant and should never be ignored. In fact, they are the leading causes of volatility and uncertainty in the market today. Those who have been following the Greece situations have noted the countless number of deadlines that have been set. This builds a lot of uncertainty. For instance, last week, a meeting of the Eurogroup (finance ministers in the Eurozone) was expected to end the crisis. Unfortunately, no solid details emerged. Another meeting happened on Monday where Greece presented a new proposal. The meeting introduced a new 48-hour deadline that must be passed. Early this month, Greece was to default the payments. The country set out a new June 30th deadline.
Another reason why the problem in Greece matters is that it affects the second most important currency in the world. The Euro is the second most liquid currency in the world and weakness in the Eurozone can have serious implications to people who own the Euro. Keep in mind that the YTD, the currency has fallen more than 20%. Further cracks can be a sign that the Eurozone will disintegrate.
This situation is further compounded by the United Kingdom which is a member of the Eurozone. After re-election, David Cameron promised to subject the country to a referendum to decide its future in the Euro. This will be a major test to the future of the mighty economic block.
How to trade the crisis
Successful traders use such global news to make most of their money. They buy when the Euro is low and stop the trades in the highs. When in the highs, they go bearish on the Euro and exit at the extreme lows.
To be successful in the Euro dominated pairs such as the EURUSD, you first need to understand the situation. Then, you need to be cautious in your capital allocation because no one really knows the outcome of the deliberations. It is also important to focus on the key market drivers of the other currency you want to trade. For instance, when trading the EURUSD pair, you should understand the macroeconomics of the American data, which will determine when the fed will tighten, without forgetting the economics of the Eurozone. You will make a mistake if you put your focus entirely on the Greece crisis.
Another mistake you should always avoid when trading the Euro is to avoid rollover trades. These are trades you leave on especially on weekends. Thing is, in the Greece crisis, things are happening on a daily basis and a simple miscalculation can have significant impacts to your account.
The Greece crisis has been a key driver of the Euro dominated pairs in the past few years. A deal before 30th will likely strengthen the Euro in the short term. However, this will not last for a very long time because of the debt mountain in Greece and the level of distrust (especially between Greece and Germany) will continue to be a thorn in the fresh. Upcoming events such as the referendum will be important for traders to take action.