Positioning for high volatility after the Greek referendum

With the US on Independence Day public holiday (or at least in lieu of it) and coming ahead of the Greek referendum on Sunday, markets have been remarkably calm this morning. Although this is unlikely to last into Monday morning. The uncertainty of the outcome of the Greek negotiations and latterly the referendum has left traders unsure of how to play the euro. However, the referendum result may not do a great deal to help the situation at all and volatility could be the main outcome.

grexitAccording to Bloomberg, the polling ahead of the referendum is too close to call. If this is reflected on Sunday then markets are going to be no closer to knowing how to play the result. Apparently, a “No” vote backs Prime Minister Tsipras to continue to negotiate to get a better deal out of the creditors. His northern European critics have been suggesting that this is a plan doomed to fail that will inevitably result in no viable resolution and ultimately a Greek exit or “Grexit” from the Eurozone. On the other hand a “Yes” vote is the equivalent of the Greek resistance throwing in the towel and acquiescing to the will of the creditors.

However the situation has been spiced up again the past 24 hours as a report from the IMF suggests that without a substantial restructuring of the debt profile, Greece will be unable to break its vicious circle of economic decline. This will have been music to Tsipras’s ears, as not only does it suggest that the creditors are not putting up a united front, but that has been Syriza’s argument all along.

The problem is that both sides are right and wrong at the same time. It is clear when taking a step back that Greece cannot grow its way out of a hole the size of a debt to GDP of around 180% without significant debt re-profiling or forgiveness. However, there are sizeable structural reforms that also need to be undertaken i Greece to improve its taxation, labor markets and competitiveness.

In many ways that is why it is likely that the vote will be very close – which would ironically be the worst outcome for Greece. with no standout victor, neither side would really have a mandate to go on. A close “no” vote would be unlikely to result in the resignation of the Syriza government and the whole situation would then rumble on.

The one big victor out of Sunday’s referendum could once again be volatility. On Monday this week the markets did not really know how to react to the news of a referendum and acceptance of Greece moving into “arrears” (or effectively default) with the IMF. That led to the euro opening 200 pips lower, only to then engage in a 300 pip intraday rebound. Any result on Sunday that lacks a really decisive outcome could result in further huge volatility on Monday following the referendum.

One week implied volatility on the euro remains elevated and this will help to drive the sharp moves on the euro on Monday.

EUR vol

Volatility on the DAX has also shot up today, over 5% higher on the day to its highest since October 2014, whilst the DAX Xetra itself has barely moved. This suggests that traders are preparing for a high volatility event. As seen in the chart below there is a negative correlation between volatility and the DAX.

DAX vol

As so often has been the case during this Greek “crisis”, volatility will be the real winner.

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