Flash Notes-Greece: At The Cross Junction

Greek government announced a referendum to be held on 5 July on whether to say “yes” or “no” to the creditors’ proposalfor bailout aid. The unexpected turn of events over the weekend is seen pushing Greece towards default as early as thisTuesday and an exit from the Eurozone. The move has caused the EUR/USD to dive to a low of 1.0955 this morning.

    The uncertainty over Greece will overhang market sentiment at least for the week, and the US nonfarm payroll report duefor release on Thur (2 Jul; instead of the usual Friday release due to US Independence Day holiday) also could add furtherto market jittery. The direct beneficiaries for such risk aversion environment will be US dollar and Japanese yen, which wasreflected in early morning trade on Mon. In Asia, negative sentiment will hurt currencies such as MYR and IDR which arealready being weighed down by their own domestic issues, as well as more liquid currencies such as SGD. USD/MYR toucheda high of 3.80 last Friday with Bank Negara reportedly in the market while USD/SGD rose to a high of1.3567 early today. RMBshould hold up relatively well as the country focuses on joining IMF’s SDR basket. However, we do not expect significantmarket distress in Asia at this point, unless the Greek drama turns into a global financial market contagion.

    While the risk of Grexit is rising and the uncertainties increasing given that we are entering the territory of default and capitalcontrols, we still think that the European authorities are both prepared and equipped to act to preserve the integrity of theeuro in the face of market turbulence from Greece uncertainties.