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Chaos in Greece Causes Turnaround in EUR/USD

Last updated 11/3/2011 5:49 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Greece collapses in total chaos as Papandreou loses majority ahead of no confidence vote
• UK PMS Services bit lower
• Nikkei -2.21% Europe -1.73%
• Oil at $91.50/bbl
• Gold $1730/oz.

Overnight Eco

• AUD AiG Performance of Service Index (OCT) 48.8 vs. 50.3
• AUD Retail Sales s.a. (MoM) (SEP) 0.4% vs. 0.5%
• NZD Employment Change (QoQ) (3Q) 0.2% vs. 0.6%
• NZD Unemployment Rate (3Q) 6.6% vs. 6.4%
• GBP Purchasing Manager Index Services (OCT) n/a 51.3 vs. 52.0

Event Risk on Tap

• USD Initial Jobless Claims (OCT 29) expected at 402K
• USD Continuing Claims (OCT 22)
• USD ISM Non-Manufacutring Composite (OCT) expected at 53.9
• USD Factory Orders (SEP) expected at 0.0%

Price Action

• USD/JPY holds at 78.00
• AUD/USD rallies back to 1.0250
• GBP/USD back to 1.5940
• EUR/USD bounces off 1.3655 lows

Risk FX seesawed though Asian and early European session as Greece continued to dominate trade flow with news from Athens changing by the minute. Earlier in Asian session EUR/USD dropped towards the 1.3650 level on very harsh rebuke from EU leaders who told Mr. Papandreou that the country will not receive “one cent” of additional aid until the referendum issue was resolved. Mr. Papandreou’s insistence on the referendum vote pushed risk currencies lower on fears that uncertainty regarding the bailout deal could tip Greece into bankruptcy.

However, the situation changed rapidly when Greek Foreign Minister Evangelos Venizelos issued a letter openly splitting with Mr. Papandreou on the issue of the referendum stating that Greece’s position within the euro area is a historic conquest of the country that cannot be put in doubt,” adding,” What is important is for the sixth tranche to be disbursed, without any distractions or delay, according to the decisions of Eurogroup of October 26, which came as a result of 10 hours of hard negotiations.”

Mr. Venizelos’s very public break with the Prime Minister caused a flurry of defections within the ruling PASOK party and the result is that Mr. Papandreou has now lost majority within Parliament and by all accounts will lose the no-confidence vote scheduled for tomorrow. If Mr. Papandreou is forced to resign triggering new elections in Greece, the issue of the referendum will become moot and will in turn remove the immediate threat of bankruptcy for Greece.

On the economic front UK PMI Services report printed a bit weaker than expected at 51.3 versus 52 eyed but remain well above the 50 boom/bust line allaying fears of possible contraction in service sector. The drop was due to the uncertain economic climate as respondents said that new business was harder to secure with client less willing to commit to fresh spending. Cable saw very little reaction to the news as traders concentrated on the headline story from Greece.

Later today the markets will also get their first glimpse of the new ECB President Mario Draghi as he faces reporters at the post council meeting press conference. There are 2 key questions that Mr. Draghi must answer. 1). Will the ECB lower its benchmark rate in light of the growing evidence of economic slowdown in the region?  2). Will the central bank continue to purchase  Italian bonds in order to stabilize the credit markets. Just as importantly as policy the market will evaluate Mr. Draghi’s posture, to see if he can command the type of presence that his predecessor Jean Claude Trichet possessed.   Above all else in this time of turmoil, the markets will be seeking reassurance that Mr. Draghi has control of his position and the EUR/USD will react accordingly depending on how well he performs.   

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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.