For many active in the financial markets, the European sovereign debt story is one that just doesn't seem to go away. But with the latest talks among the region’s finance ministers, it is starting to look like the story is far from over. Increased potential for a Grexit (or, Greek exit) from the monetary union has led many investors to question the total effect that might be had in equity markets or even in the euro currency itself. The general assumption is that a Greek exit would be a negative event for the euro, but why is this the case?
Daily chart perspective: EUR/USD
Source: CornerTrader
Against the U.S. dollar, the euro has experienced steep declines for most of this year. Most of this activity has been based on changing expectations for the Federal Reserve to begin raising interest rates. Euro bulls have attempted to stage a recovery since March, but these efforts have been lackluster at best. So there is not much positive momentum here to propel the euro higher if we see that Greece is forced to exit from the monetary union.
This also does nothing to discouraging potential investors from focusing on the fact that an exit would throw the rest of the region into a period of uncertainty that would inevitably generate declines in the underlying currency. Many have argued that a decision in Greece to exit the monetary would actually be a strong economic positive for the region, as some of the “dead weight” would no longer be factored into important GDP measurements in the Eurozone.
While there is a good amount of truth to this, any positives should be viewed as long-term in nature and unlikely to bring a quick round of euro bulls back into the market. For this reason, continued discussions of a Greek exit would likely be euro-positive in the long run but euro-negative in the short run. Currency values can have a drastic impact on a wide variety of asset classes (not simply in the foreign exchange market by itself). So even if your investments are focused on areas like stocks or bonds, the underlying value of the euro itself will almost certainly have an impact on your market positions.
Financial health in the eurozone is important for all countries in this new world economy, so we are likely to hear about the ripple effects in the region’s sovereign debt crisis for some time to come. Investors with active positions in the market will need to continue monitoring global news sources in order to have a proper understanding of what is happening in the region, as added evidence of uncertainty is likely to impact stock indices around the world well into next year.
