As the markets try and gauge the likelihood of a Greek exit from the euro, we present a simple hypothetical decision tree. It provides a framework for analysis of this complex problem. This is not a forecast but one way of looking at the problem for the EUR. A different tree may be applicable for other asset classes. The likely extent of contagion to the rest of the Eurozone is an obvious starting point in the analysis, but Greece’s experience after its exit would be the other critical element to the euro’s performance.
Renewed tensions in Greece have reasserted the dominance of the risk-on/risk-off (RORO) dynamic for the currency market. However, while risk is the over-riding consideration for now, there have been signs that interest rates are getting renewed traction in FX. Not only are correlations between rate differentials and many exchange rates on the rise, but it also seems that the potency from policy rate expectations for movements in FX is intensifying.
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