Agreement On Greek Austerity Boosts Sentiment, But Effect May Be Temporary

June 24 2011 by Spencer McKay in Forex Release |No Comments

Last night’s announcement of an agreement between the Greek government, EU and IMF on future austerity measures has managed to halt the spiralling decline in risk assets seen yesterday, and we have witnessed an encouraging recovery in most equity indices as well as EURUSD. However, this agreement should only be seen as required first step (this package still needs to be voted on by Greece’s parliament), and while it has come as a welcome short-term respite to strained markets, it seems there is still a long way to go before policy makers can throw together a decisive and viable solution to the long-term problem of Greece’s debt. As such, we remain cautious of getting carried away in bullish momentum, and instead view this rebound as an opportunity to re-load short EURUSD positions up at more attractive levels. Thus far today, economic data has been limited to the latest German IFO surveys for June – but on the whole these readings were better than expected. The current business climate numbers climbed to 114.5 (113.4 expected, 114.2 prior), current assessment 123.3 (120.8 expected, 121.4 prior), and the expectations component hit consensus estimates at 106.3 (107.4 prior). This comes in stark contrast to yesterday’s dismal showing from both European and US data. In summary, risk appetite was softer across the board yesterday, as PMI figures for the Eurozone were weaker than consensus forecasts, and peripheral bond spreads widened; with Portuguese spreads hitting record highs. Adding to the gloom, S&P downgraded the credit rating of Ireland’s Anglo Irish Bank to CCC, outlook negative – citing the government’s preference to impose burden-sharing on debt holders. Perhaps the only non-negative news from the EU was the formal confirmation that Mario Draghi has been appointed head of the European Central Bank from November 2011 until October 2019. There was little optimism to be gleaned from data outside the Eurozone, as the UK’s CBI reported sales came out at -2 compared to estimates for +13 – the worst numbers for 12 months. In the afternoon session, US claims data was elevated; with the initial claims component hitting 429k (415k expected, 414k prior) and continuing claims jumping to 3697k (3670k expected, 3675k prior). The major news from the EM space was the Czech central bank rate decision, where policy makers voted 5-2 to keep rates unchanged at 0.75%. The two dissenters voted for a 25bp hike, but Vice Governor Tomsik stated that inflation expectations in the country remain well-anchored in spite of plans to hike VAT. Looking ahead to this afternoon, we will receive the third and final reading for US Q1 GDP where markets are expecting an upward revision to 1.9% QoQ (annualized), compared to the previous 1.8% print. There will also be US durable goods orders and core PCE – but we anticipate that the currency market is more likely to take its directional cue from equity market sentiment and peripheral bond performance into the close.

12:30 USD Real GDP, % q/q saar Q1-3rd; exp: 1.9, prev: 1.8
12:30 USD Durable goods orders, % m/m May; exp: 1.5, prev: -3.6

The Risk Today: EurUsd After slumping over 300 pips in 24-hours to lows of 1.4128, EURUSD was saved from the abyss by the announcement of an agreement between Greece, the EU and IMF on future austerity measures; prompting a quick round of short covering that took us back up to 1.4277. However, the technical picture still looks pretty bearish to us, with the ongoing influence of a rising wedge pattern still in play. The rising wedge became active up at 1.4350 levels, and we are aiming for a target around 1.3990 (calculated by taking the distance between the lowest trough of the rising wedge and the highest peak, and applying it to the point of break out). Taking into consideration the most recent moves, we now trail a stop to 1.4280 to ensure we lock in profits even if the rally continues. Next downside supports seen at 1.4128 (17 Jun low), 1.4068 (26 May low), 1.4000 (psychological support), and 1.3970 (23 May low). In the meantime there should be plenty of sellers willing to cap the topside; next resistance is noted at 1.4277 (aforementioned overnight highs), 1.4441 (22 Jun high), 1.4497 (14 Jun high) and 1.4550 (10 Jun high).

GbpUsd Just as we discussed in yesterday’s report, the break of GBPUSD’s 1.6060 support marked a critical turning point, as that area has now proven itself as decent resistance to any recovery rallies. Capped by sellers around 1.6060-65 we have slumped lower, negating psychological support at 1.6000 and hitting a low of 1.5939. Expect more of the same trend today, with focus turning to supports at 1.5937 (28 Mar low), 1.5823 (31 Jan low), 1.5752 (25 Jan low) and 1.5718 (13 Jan low). In the meantime, resistance comes into play at 1.6029 (overnight rebound high), 1.6060-65 (aforementioned resistance), 1.6262 (22 Jun high), 1.6384 (15 Jun high), and 1.6442 (14 Jun high).

UsdJpy Yesterday we noted a very significant area of resistance at 80.70 on the USDJPY chart, as well as the possibility that a descending triangle may be forming. However, the bulls have managed to overcome 80.70 in the past 24-hours, threatening the viability of the triangle pattern, and even more significantly, breaking a key trendline. Although the upside momentum has been far from spectacular (the high on this move is only 80.80), we are vigilant that another push to the topside may be coming. Next resistance is eyed at 81.05 (15 Jun highs), 81.78 (31 May high), 82.79 (27 Apr high), 83.27 (18 Apr high), and 83.79 (15 Apr high). If this upside break turns out to be a false alarm, the key support is 80.00. That level represents not only historical and psychological support, but also the base of the triangle pattern. Should the triangle become activated, we’d get short, and aim for a target of approximately 79.00. Only supports below are noted at 79.57 (5 May low), 78.26 (17 Mar low), and the all-time low 76.40.

UsdChf USDCHF has gradually slid lower in the past 24-hours, hitting a low of 0.8364 this morning and prompting us to believe that the downtrend is ready to resume. We remain fairly convinced there will be a return to the all-time low 0.8327 (7 Jun low) in due course, and perhaps beyond. Below 0.8327, we once again embark on an exploration into uncharted territory, and are wholly reliant on psychological supports like 0.8300, 0.8200 etc. In the meantime expect sellers to thwart most rallies; resistance is stacked at 0.8400-10 (upper edge of current downtrend), 0.8439 (yesterday’s high), 0.8474 (20 Jun late rebound highs), 0.8516 (20 Jun high), 0.8551 (15-16 Jun highs), 0.8595 (rebound highs seen 27 May), and 0.8734 (26 May high).

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