Uncertainty Around Greece Remains

July 7 2011 by Spencer McKay in Forex Release |No Comments

FX markets are still trading around the evolving situation in Greece. In fact participants are discounting just about everything else non-Greek related. Gains in EURUSD made yesterday have slowly eroded in Asian trading as headlines suggest that problems in Greece are far from being solved. EURUSD dropped from 1.4223 to 1.4133, while EURCHF continues to pressure the 1.2000 region. Asian regional indices were broadly lower with Shanghai composite posting new yearly lows. Headlines from ex-US Fed Chairman Greenspan saying default by Greece is “close to certain”, greeted European traders–really setting the negative tone for European trading.

Risk appetite got some relief from market chatter that the PBoC would expand the CNY trading band this weekend from 0.5% to 1%. However, comments from Juncker suggesting that he sees the path for Greece as “extremely difficult” squashing any fledging rally that the EURUSD was developing. The primary concern around the Greek bailout continues to be the role of private debt holders. The credit rating agencies insist that any form of restructuring would trigger a “credit event, while the ECB suggests the measure must be voluntary and Germany would like the private sector to pay. The news feeds are suggesting that the IMF has convinced Germany to soften their position slightly; however, it still seems that an agreement is far from certain. A clear reflection of this divergence was seen in EU peripheral yields and CDS prices which went ballistic yesterday. Hypothetically even if the EU/IMF and Greece do find a solution, we suspect that the rally in risk appetites especially regarding the EUR, will be limited. Any bailout plan will be short term in nature and undoubtedly, Greece will be faced with the same problems a year down the line. There has been nothing in the headlines which suggests to us that the EU is taking steps to end this spiral. In fact the additional austerity that’s being pushed on Greece is more likely to damage growth prospects and create a wider funding gap in the future. Should the EU be able to kick the can far enough down the road that currency traders look for new themes, the other major story hurting risk appetite is the global challenges to growth with favor safe haven trades.

In regards to safe havens the new darling of currency traders, the CHF continues to have a green light for further appreciation. Yesterday the SNB held its 3m Libor target rate unchanged at 0.25% as universally expected. It also held the 2011 GDP forecast at 2% and inflation marginally lower at 1.0% from 1.1%. However, there was nothing to suggest that higher rates or effort to impede the CHF around the corner. The SNBs Hildebrand mildly mentioned that the central banks were worried about the CHF exchange rate, but Dentine clearly stated that physical intervention was not an option. We remain positive on the CHF with the strongest trade continuing to be against the EUR as events across the Swiss border look unlikely to resolve in a satisfactory manner.

Interestingly a headline from a Greek source stated that an agreement had been reached in Greece, gave the EUR a knee jerk boost. The size of the rally verse the substance of the story suggested how nervous traders are. As for today, the light economic calendar will keep trades subdue and we anticipate heading into the weekend, long risk correlated trades which will be paired down for safety.

08:00 EUR ECB’s Nowotny Speaks
09:00 EUR Construction Output wda (Apr
09:00 EUR Euro-Zone Trade Balance sa (Apr)
09:00 EUR Euro-Zone Trade Balance (Apr)
11:00 EUR ECB’s Bini Smaghi Speaks
12:30 CAD Wholesale Sales (Apr)
13:00 USD IMF Releases Economic, Financial, Fiscal Updates
13:55 USD U. of Michigan Confidence (Jun P) index
14:00 USD Leading Indicators (May)

The Risk Today: EurUsd Very choppy summer trading should keep intraday ranges intact. Sharp break of uptrend support at 1.4197 Wednesday gives scope for a broader move to 1.4068 (yesterdays low) then 1.4000 (psychological support) as long as pair trades below 1.4300. Should demand materialize 1.4309 (intra-day high) stands as first resistance then 1.4497 (14 june high)

GbpUsd Failure to convincingly break above daily cloud base at 80.89 suggest further range bound action. Deeper short term correction looks to test bullish uptrend support which comes into play at 80.35 (from 8 June), On the upside resistance is located at 81.25, then 81.78 (31 May high).

UsdJpy After a neck breaking fall the pair was finally able to find buyers the 1.6060 support however, the pair still feels heavy. Should support at 1.6050 give, the next support stands at 1.5937 ( 28 March low) than 1.5752 (25 Jan low). Intra-day highs at 1.6170 should cap near term moves, than a long way up to 1.6442 (14 June high).

UsdChf Yesterdays SNB meeting failed to shift trader’s bullish CHF sentiment and risk across the board has the CHF well in demand. We are expecting a continued reversal off yesterdays 0.8850 highs. Resistance at 0.8551 (15 June high) should provide the first barrier than 0.8662 ( 27 May high) Critical support is located at 0.8328 (6 June low) then below completely uncharted waters.

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