All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

Euro Rally Reverses as Fears Mount That Bailout Will Fail

Last updated 4/26/2010 5:22 AM ET (GMT -5) 11 Comments

• Share this:

Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Greece's George Papaconstantinou confident of EU-IMF package
• UK LibDems Clegg - PM to us if Labor wants a deal
• Asia up strongly 2.0% Europe up 1%
• Oil at $85.20/bbl
• Gold at $1158/oz. gaps higher on open

Overnight Eco

• JPY CSPI -1.1% vs. -1.3% eyed

Event Risk on Tap

Price Action

• USD/JPY holds above 94.00 but little forward traction in overnight trade
• AUD/USD strengthens to .9300 as risk appetite revives
• GBP/USD 1.5500 caps but holds tight at 1.5400
• EUR/USD gives back most of the rally as Greeks bonds widen out again

After opening strongly at the start of week’s trade, the EUR/USD gave back most of its gains as Greek bond spreads widened once again to 600bp+ to German bunds on trader concerns that the EU-IMF bailout deal  may not be ratified. Over the weekend Greek Finance Minister George Papaconstantinou stated that final terms and conditions of an aid package for Greece will be ready by early May and that it will be acceptable to all his partners in the euro zone, including Germany.  "We're all confident that this will be done in time and that we will be able to finance Greek public debt without any problem," he told a news conference.

As a result of his remarks, the euro rallied in Asian trade building up on its gains from Friday to reach a high of 1.3397. However, when Europe came on line the pair began to slip to 1.3300 as Greek bond yields once again widened out. The market remains uncertain about Germany’s commitment to the deal and more importantly traders are increasingly concerned that the logistics of the financing package will not be available in time for Greece to roll over its debt by middle of May.

If the bailout package meets stiff resistance in German legislature, the chances of an EU  currency crisis will doubt escalate and EUR/USD could fall through the critical 1.3000 level a panicked selling pushes the pair lower. However, with EU officials aware of the gravity of the situation we doubt that they will allow the crisis to remain unchecked. If Ms. Merkel can force the approval through the Bundestag a lot of the pressure on the EUR/USD will be relieved and the pair could stabilize at these levels supported by  improving economic fundamentals in EZ.  

Meanwhile cable  was capped at the 1.5500 level as the spectre of hung Pariliament hangs over the currency. Over the weekend the LibDems leader Nick Clegg noted that if Labor wants a collation government it may have to allow LibDems to assume the Prime Ministership. As we noted earlier, “Some Labor party officials are coming to the pragmatic conclusion that   this may be the only way for the party to stay in power.  instead of being a problem a three way tie in UK elections could actually strengthen the political process by creating a unity government between Labor and LibDems that would provide a very healthy margin of victory in the Parliament and in turn would allow for quick and broad legislative action on the fiscal front. That thesis, of course, rests on the assumption that LibDems and Labor would be willing to negotiate in goodwill and would quickly come to terms on a deal for coalition rule.”

In North America today the calendar is barren so trading is likely to be driven by dynamics on the other side of the pond, as market participants prepare for the FOMC meeting this Wednesday which could reveal a more hawkish posture by the Fed.

FX Upcoming

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

• Share this:

Comments (11)

jet

April 26, 2010 at 04:12 PM ET

Yeah what about portugal????????????

jet

April 27, 2010 at 07:59 AM ET

Well look at that a day later and the market is thinking about not only portugal AND spain - why didn't you bring that up/????

bschlossberg

April 27, 2010 at 08:15 AM ET

Its all the same contagion story and it all rests on Germany. If they don't stop the bleeding euro goes to 1.30 if they do the short will get squeezed

chua soon ching

April 28, 2010 at 03:31 AM ET

I think it's not just Greece, Spain, Portugal...Ireland and Italy will come into picture soon. Spain and Ireland are both having extensive exposure to property bubbles. And Portugal is having problems with growth-the lack of it??

chua soon ching

April 28, 2010 at 03:23 AM ET

Poor German!! The Germans need to work their life away to take care of the rest of Euro who opt to retire early in their life!!

MoneyManager

April 28, 2010 at 03:49 AM ET

Don't lose sight of the fact that German banks and French banks and other banks share responsibility for this mess. Instead of making mortgages to people who just "stated" their incomes, these banks lent money to countries that were living beyond their means, and they continued to roll over the debt time and time again even though the fiscal situation in the creditor countries continued to deteriorate. The bailout is not exactly a bailout of Southern Europe, but a bailout of Northern European banks. Both sides share in the responsibility, and both sides should share the pain. What is sad for everyone else is that we may see a demand falloff as a result of this, because living standards throughout Europe are going to have to be adjusted as a result of this fiasco.

alexjbrandt

April 28, 2010 at 07:54 AM ET

MM, the primary and basic purpose of a bank is to lend money and assume the risk of not getting it back. I think its more of a crime to have a bank like Goldman Sachs enable a country such as Greece to hide part of its debt to investors/banks through a currency swap. A bank loaning a country money to fill a budget gap is a lesser evil. Heck, this is what the purpose of the IMF/EU "bailout" does! So in your opinion is the IMF/EU contributing to Greece's unstable fiscal situation by loaning them money and assuming the risk of not getting paid back or is the IMF/EU helping the situation?

Another thing to think about is, do you punish the bank for making the loan or do you punish the consumer or country for needing the loan?

MoneyManager

April 28, 2010 at 09:37 AM ET

alexbrandt, the basic purpose of a bank is to *prudently* loan money that will be repaid in the vast majority of instances, and *not* to "bet the franchise" on a single debtor, or even a single class of debtors. (The very old joke goes: If you owe the bank 5 million dollars, the bank owns you, but if you owe the bank 5 billion dollars, you own the bank). And if you are looking for me to defend GS, you'd better go look for someone else. But banks that lend imprudently, banks that overexpose themselves, do no good for their shareholders, debtors, or society as a whole.

Budget gap??? Surely you are joking. This is more like a variation on a Ponzi scheme (just roll over debt eternally, never really retiring it, and even add to it incrementally, until it is "suddenly discovered" to be unsustainable.) Meanwhile the bank books profits, pays bonuses, taxes and pensions and shareholders, just like it was, you know, *sustainable* profit. And the debtor has no need to reform, ever, as long as the bank closes its eyes and plays along. It's a warped symbiotic relationship. Once again, I will state that the entities that are being "bailed out" here are the creditor banks, every bit as much as the debtor. I have clearly stated, if you care to re-read, that pain is going to have to be shared. The banks acted imprudently, and of course the debtor in this case is quite culpable, too. They both need to suffer some punishment or the mistake will be repeated. (As it probably will be in any case.)

alexjbrandt

April 28, 2010 at 09:55 AM ET

Any bank that is interested in self preservation should be prudent in who they loan money to. I wasn't looking for you or anyone to defend GS (I myself have been critical of Wall St). I just wanted your opinion on the EU/IMF bailout in regards to your post about banks/investors (anyone who loans Greece money) need to share the pain. I agree with you that there is a point in which financial institutions can cross a line that they end up jeopardizing our economic stability. However, I think that the banks are being indirectly bailed out rather then directly. I think that the debtor should be punished more then the creditors, as it is the debtor who is responsible for managing their finances and to not rely on borrowed funds for extended periods.

MoneyManager

April 28, 2010 at 10:24 AM ET

Perhaps the debtor has more of the burden of responsibility. But it's not impossible to argue the other way, either. An entity that *needs* funding may be expected to gloss, or distort the truth, or even lie. This is absolutely normal human behavior that any lender should be on the alert for. Debtors want money, which lenders have. Debtors can be expected, perhaps *should* be expected, to try and impress lenders with their earnestness. Ideally, that would always be via a truthful and completely disclosed representation. But then, that wouldn't be human nature anymore. :)

About the bailout in general, I'm afraid it has to be done. If not, the banks take a huge hit, there is another violent credit contraction, ultimately causing a possibly severe demand falloff. Directly, or indirectly, it's the banks that matter the most in terms of consequences. If Greece disappeared tomorrow, it would be missed for sure (I have friends in Athens), but it would mostly affect just Greeks. If there is a pan-European banking crisis so soon after the last one, it could affect the entire globe. I do hope no innocents suffer, but then I'm not naive either. They are the ones who usually suffer most.

Democracy works surprisingly well, especially up to the point that enough citizens discover that via democracy they can coerce their representatives to raid the public coffers for them. :) After that, it may be all downhill.

chua soon ching

April 28, 2010 at 11:26 AM ET

hmmm... what goes around comes around!! Karma!! Btw, who's profiting from these fiasco in Euro Zone?? Sounds like someone out there are trying to get the attention away and recoup the losses they made 2 years back!! Then again... it's only a thought!!

Add Your Comment

Please login to post a comment or sign up for an FX360® account.

Loading...

About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.