FOLLOWING weeks of turbulence, FX appears to have found temporary support. So this week I want to consider three unlikely, but not improbable, scenarios that could have a radical impact on the markets this year.
GREECE IS THE TIP OF THE ICEBERG
The news that Greece used complex swaps to improve its budget finances put pressure on the euro. Although it has stabilised, investors’ fears have not disappeared, since economic problems are rarely isolated. While many traders are concerned about Spain, the real problem could be Italy. It is the Eurozone’s third largest economy, and if markets grow wary of Italian sovereign debt, the euro’s slide could accelerate markedly.
CHINA’S REAL ESTATE BUBBLE BURSTS
China is in the process of developing nearly 30bn sq ft of commercial real estate – enough for a five by five cubicle for every Chinese citizen. This reminds me of the late 1980s when the land around the Emperor’s palace in Japan was worth more than the real estate value of California. If China’s bubble suddenly bursts, the Aussie will be vulnerable to a massive sell-off, because of Australia’s close economic ties with China.
ISRAEL BOMBS IRAN
Although capital markets are complacent about the Middle East conflict, oil traders remain on edge about Iran’s nuclear development programme. Last week the IAEA officially acknowledged that Iran is trying to weaponise its programme. If Israel acts preemptively, the spike in risk aversion could grind global economic activity to a halt, sending risk FX tumbling and the greenback soaring.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail firstname.lastname@example.org.