Greek Crisis Still Rolling & Evidence of Contagion Mounting

June 27 2011 by Spencer McKay in Forex Release |No Comments

Events in Greece have once again become the dominate driver for FX. USD remained in demand carrying over from Fridays close, as the weekend news flow suggested continued uncertainty around the austerity vote this week. EU Peripheral sovereign debt yields continued to widen against German bonds (Italy vs. German 10yr govt bond yield spreads widens to a euro lifetime high of 218bp) and S&P continue to come under selling pressure dropping -1.17% on Friday. Asian equity markets were unable to halt the bearish slide with the Nikkei down -1.03%. Greece’s parliament is expected to vote on last week’s EU delivery austerity package (expected Wed or Thur). Last week, PM Papandreou’s social party’s successful navigation through the “no confidence” vote suggested that the passage of the EU austerity proposal would be difficult but highly possible. However, with a thin winning margin there has always been a fear that the package would be rejected. Over the weekend Greek media are now reporting that 4 Pasok deputies are considering voting against MTFS. But even if it should pass traders are growing uncomfortable with the short term solution. The political tide is shifting and as spending cuts will take their toll on every day Greeks, the likelihood of civil reaction through unrest and political backlash increases. The EU mentioned the concept of flexibility and “reprogramming” the agreement, but perhaps what the Greeks are thinking, might be more along the lines of complete renegotiation as politics change. On the other side are the EU members that seem increasingly dispirited with their roles in the bailout (although rumor that France, Spain and UK have negotiated with banks for debt restructuring is a positive). There is a high probability that either a rogue nation dissents from any bailout and/or Germany’s Constitutional court declares last year’s bailout unconstitutional.

So despite EU officials attempt to put a short term patch on it, the EU debt crisis keeps rollin´ on. It’s important to note that there has been a noticeable shift in investor’s sentiment as exhaustion sets in. After Bernanke’s call for immediate EU action at Thursday’s FOMC press conference and subsequent EU Greek bailout proposal, we are not sure what the next stage will be, should Greek politicians reject the plan. Clearly, the “canary in a coalmine” for Europe is the EURCHF and the pair’s deprecation to new all time lows 1.1806, suggests that traders are concerned. Interestingly, even headlines that China Premier Wen Jiabao pledges further support for Eurozone debt, failed to noticeably shift the EURs bearish tone. The market has become numb to headline grabbing announcements (such as this week’s Papandreou survives no confidence vote & EU offers new bailout) which have too many “if” and merely solve a temporary problem. There is a growing sentiment that Greece is a ticking time bomb.

Should Greece actually pass the austerity program, then for the next five years plus, every quarter, traders will be measuring if Greece will have funding gaps. And with up to 4.00% (estimated) cut from top line GDP growth, for the next 5 years, the probability that the fiscal contraction will actually push Greece into the abyss increases significantly. In addition, weakness in the US and global growth story doesn’t bode well for the theory that organic growth will offset EU/IMF mandated cuts. Then you throw in EU contagion and Greece’s domestic turmoil and a small bailout doesn’t feel so impressive.

As for today, the US data will temporality grab the market’s attention expectation considering last week overly optimistic US economic assessment. With clear indications that QE3 is currently not on the table, but further erosion in data is expected in the near term (then rally in H3), the question is: how weak does the data need to go? Today’s US data such as personal income, personal pending will be interesting indicators to the health and sentiment of the US consumer.

11:30 EUR ECB Stark speaking
13:30 USD Personal Income Last 0.4 Exp 0.3
13:30 USD personal Expenditure Last 0.4 Exp 0.1
13:30 USD Core PCE Last 0.2 Exp 0.2
16:00 USD Fed Kocherlakota speaking
17:00 EUR ECB Stark speaking
18:00 USD Fed Hoenig speaking
18:00 GBP Posen speaking

The Risk Today: EurUsd Greek political derived volatile continues to dominate the EUR as uncertainty generates further bearish price action. Today’s move below 1.4165 (bullish uptrend floor) and near attempt of 1.4100 support has strengthen our conviction for further downside. First support now stands at 1.4074 (16th June low) then 1.3970 (23rd May low), and 1.3865 (200d MA). With traders waiting for a yes vote on Greek austerity supply should come into play at 1.4224 (intraday high) then 1.4306 (24th June High) and 1.4412 (22nd June range high).

GbpUsd This pair is sending nothing but bearish signals and traders are prepared to sell on rallies. The ease which the cable slipped through 1.6040 (200d MA) support gives scope for a move to 1.5822 (31st Jan low) then 1.5752 (2th Jan low). Should demand finally show-up, watch for 1.6075 (23rd June high) to provide the first area of resistance, minor psychological support at 1.6200 then lots of noise till 1.6232 (22nd June high).

UsdJpy This pair continues to underwhelm us and continues to trade within a constricted range. Even today directional move above 80.70 (short term range ceiling) fails to proved guidance. We should remain will within the 79.80 to 80.89 (daily cloud base). First support is located at 80.00 (psychological level) then 79.70 (8th June low) and 79.57 (5th May lows). On the upside 80.89 (daily cloud base), 81.33 (2nd June high) should keep upside capped.

UsdChf Whos not bullish on the CHF right now? Mass exodus from EURCHF longs continues to give the franc support. The USDCHF continues its bearish onslaught on all support and today’s corrective rally seems to be already fading. The break of 0.8330 suggests of a test of 0.8300 then 0.8200. Resistance is located at 0.8463 (21st June high) then 0.8551/53 (15ht & 16th June high) and 0.8612 (bearish downtrend ceiling).

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