Almost every forex trader is now talking about the Greece situation. The situation is so unpredictable that it would be advisable for a trader to stay out of the Euro currency just in case it decides to pull the Swiss franc stance after SNB decided to lift the currency cap. Avoiding the Euro doesn’t however mean that a trader will be shielded from the Greece effect. The forex market is so correlated that events in one currency can greatly affect another currency. A trader can only be safe by understanding what an event in one currency means to the overall market. In fact, acquiring this knowledge can also present new opportunities to make some extra pips. For this reason, it is important to analyze how the Greece situation is likely to affect other currencies.
Short-term implication of the Greece situation
My personal view is that retail traders should be more concerned about the short-term implication of the Greece situation. Scalpers, day traders, and Swing traders can adjust their strategies as the events unfold. They, therefore, do not need to worry about what will happen several months or years after, for instance, Greece is kicked out of the Eurozone.
To short-term traders, focus should be on the implication of the Greece crisis on particularly, the Euro, the USD, and the Yen. These currencies are likely to be affected more by the Greece situation.
Any negative news concerning Greece is expected to have a short-term negative impact on the Euro. One thing however I have so far learn is that things are not always straightforward in the forex market. At the moment, I would say it is safe to avoid the Euro currency pairs unless your extremely experienced or have some ‘insider’ knowledge. Look for trading opportunities at JPY and USD
Impact on Yen and the Dollar
The fact that people of Greece voted no in the referendum has somewhat lead to a risk-off sentiment. A Risk-off sentiment simply means that traders are risk-averse. They are therefore likely to seek refuge in what they perceive as safer investments. In this case Japenese yen. The Yen is, therefore, likely to strengthen.
Euro and JPY are highly correlated. My observation based on the past three weekends is that every time there is a gap in Euro currency pairs, there is also a gap in JPY currency. See an example of a gap in EUR/USD and USD/JPY in the figures below.
The gap clearly tells me that there is a significant correlation between the Euro and the Yen. A further analysis of this relationship indicates that the risk can best be explained by considering risk-on and risk-off sentiments.
Risk-on and Risk-off Sentiment
Past observation, views from various analysts, and some studies suggests that when investors are risk-averse (market experiencing risk-off sentiment) the Euro is likely to weaken while the Japenese Yen is expected to strengthen. This can explain the gaps highlighted by the above figures. Traders were risk-averse and therefore they sold the Euro leading to a down gap in the EUR/USD. The risk-off sentiment pushed traders to buy more Japanese Yen, leading to down gap in USD/JPY. In other words, the Japanese yen during that weekend was stronger than the USD dollar.
The vice-verse also applies. In other words, in case traders and investors accepts more risk (risk-on sentiment). The euro will gain, and the Japanese yen will weaken. We can, therefore, anticipate the dollar to strengthen against the yen.
Yen is currently a safe haven
My sentiment at this moment is that the risk-off sentiment is likely to continue as long as the future of Greece and the Euro is unclear. The yen, therefore, is expected to be a safe haven as the euro and dollar weaken against it. Traders should, therefore, be watching for news and other indications hinting an exit of Greece from the Euro Zone and place their trades accordingly.
The Swiss franc is also another safe haven. The Swiss National Bank, however, has stated that it will control any irrational buying of its currency. NZD and AUD might also act as safe haven but their fundamentals are currently weak.
Worth noting, however, is that the dollar is likely to strengthen against weaker currency pairs, particularly AUD and NZD. This likely to occur firstly because international businesses may consider it as an alternative to Euro, and secondly because AUD and NZD fundamentals are currently weak.
According to Bloomberg, Institutional investors are considering the risk-off sentiments while choosing their trades. They are therefore considering shorting the EUR/YEN as oppose to EUR/USD in case Greece falls into deeper problems. The yen is likely to strengthen than the USD dollar (since it is the safe haven) in case Greece falls into deeper problems. Therefore, the Euro versus the Yen is likely to decline more than the Euro versus the dollar.