Optimism Over Greek Vote Fades

by: Isla Marchant on: June 22, 2011

The USD continues to gain today, as yesterdays FOMC meeting seems to have steered members away from QE3 while sounding somewhat hawkish. EURUSD dropped from 1.4442 pre-meeting highs to 1.4342, while AUDJPY, our carry and risk barometer, continued to consolidate between 84.09 and 86.45. While news flow was light, negative sentiment permeated trading, as the optimism around the Greece vote faded. Asian regional indices were lower following Wall Street’s down day. 5yr sovereign spreads for Greece, Spain, Ireland, Portugal and over in Germany widened out a bit after coming in on Monday.

The FOMC went pretty much as expected, as the statement confirmed that QE2 would finish at the end of June and the critical policy statement “exceptionally low, for an extended period” was unchanged. Interestingly enough, what we viewed as part of the hawkish slant, was how the Chairman suggested that inflation concerns were the primary reason why further easing would not be used. In addition, we had expected that the FOMC would reiterate that the Fed balance sheet should not be changed from its current level; however the Chairman made no such promises. The natural contraction of the Feds massive balance sheet is by itself a form of tightening and by default, provides the first steps toward normalization. As for the Fed monetary policy, we suspect that the FOMC will hold fed fund rates steady until summer 2012 and will eventually decide that reinvestment of balance sheet cash is in the countries best interest. The limited reaction to the realization that the Fed is concerned about inflation and would be passively tightened, really didn’t have a momentous effect on the USD, especially considering events in Europe.

Its clear when scanning the media headlines, that the overarching expectation is for a default in Greece’s sovereign debt and many pundits calling for the eventual breakup of the Euro zone. This is a considerable shift from a year or even three months ago, when such ideas were considered taboo. Now however, such ideas are wide spread and safe within the populous dialog. Using the EURCHF as a gauge of the markets being convinced in the EU policy maker’s ability to manage the Greece situation, things are not going as planned. EURCHF dropped this morning to 1.1978 and sovereign fears lingered as the German PMI data fell worse than expected. When you clear through all the verbal garbage, the one thing that is an absolute, is that there must be strong growth for both Germany and France.

Without growth, the economic and political will for the core of the union to support the EU, will evaporate in our minds. German “flash” PMI manufacturing fell to 54.90 vs. 57.7 prior readings, while French “flash” PMI manufacturing dropped to 54.0 from 52.5 prior readings. The erosion in sentiment clearly is worrying trend and will impede any orderly bailout of Greece. We should note that Chairman Bernanke in yesterday’s press conference mentioned that continued disorderly management of the situation in Europe would be negated for the global economy. This was a clear warning that the Fed wants the situation in Greece to be quickly and effectively managed. This comment suggests to us, that our view that the near term solution will be a straight EU / IMF / ECB bailout with zero private debt hold participation, is highly probable.

As for today, with no further tier data on the docket, markets will be content to drift in summer malaise. We still feel there is an over-arching bearish tone to assets, making us more likely to play the short term ranges than to commit to a directional trend.

06:00 CHF Trade Balance (May) CHF
07:30 EUR GE PMI Manufacturing (Jun A) index
07:30 EUR GE PMI Services (Jun A) index
07:30 SEK PPI (May) y-o-y n/a
08:00 EUR PMI Composite (Jun A) index
08:00 EUR PMI Manufacturing (Jun A) index
08:00 EUR PMI Services (Jun A) index
12:30 USD Initial Jobless Claims (Jun-18) 415K exp
13:15 CAD BoC’s Murray Speaks
14:00 USD New Home Sales (May) 310K exp
16:00 GBP BoE’s Adam Posen Speaks
18:30 CAD BoC’s Murray Speaks

The Risk Today: EurUsd Welcome to summer trading. The optimism surrounding the survival of PM Papandreou Greek socialist party quickly faded. And any meaningful test of resistance at 1.4452 (15th June high) than a potential broader move to 1.4583 (bearish trend ceiling from 4th May) will have to wait. The break of 1.4325 (bullish trend floor) support negates the recent uptrend. Support now stand at 1.4185 (110d MA) and 1.4127 (17th June Low). Given the lack of participation watch for the 1.4076 – 1.4583 range to remain intact.

GbpUsd Yesterday bearish BoE Minutes have taken the fight out of sterling bulls. The strong reversal off 1.6079 (16th June low) stopped short of 1.6280 resistance and the break 1.6029 (200d MA) and 1.6079 (horizontal floor & 16th June low) point to further downside. The next support is located at 1.5937 ( 28th March low) then 1.5752 (25th Jan low) There is plenty of room on the upside should we manage to reserve direction. After 1.6280 is 1.6313 (50% retracement from 1.6547 to 1.6079) then 1.6442 (14th June high)

UsdJpy This pair continues to underwhelm us and continues to trade within a consolidating pattern. Even today directional move above 80.40 (short term range ceiling) fails to proved guidance. We should remain will within the 79.80 to 82.23 (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 81.33 (2nd June high) should keep upside capped.

UsdChf Tech still point to further deprecation but the CHF look to be taking a breather as market watch event in Europe. Further correction from 0.8550 (16th June high) suggests 0.8331 to 0.8556 range remains intact and makes the downside look appealing. Light buying should start around 0.8348 (14th June low) then key support at 0.8300 (psychological level) should kick in. On the topside 0.8556 (38.2% retracement of 0.8951-0.8326) then (50.0% retracement of 0.8951-0.8326) should provide ample supply.

Similar Posts:

Share
No Comments »

Post comment