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Euro Rallies on Hopes that Greek Deal Close

Last updated 1/27/2012 5:45 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• EU Rehn- we are close to PSI deal
• EUR/CHF holds above 1.2050 after BIS buying
• Nikkei off -0.09% Europe -0.16%
• Oil above $100/bbl
• Gold at $1726/oz.

Overnight Eco

• JPY National Consumer Price Index (YoY) (Dec) -1.1%
• JPY National Consumer Price Index Ex Food, Energy (YoY) (Dec) -0.1%
• JPY Retail Trade s.a. (MoM) (Dec) 1.8% vs. 0.4%
• JPY Large Retailers' Sales (Dec) -0.4% vs. -0.5%
• NZD Trade Balance (New Zealand dollars) (Dec) 338M vs. -74M
• CHF KOF Swiss Leading Indicator (Jan)

Event Risk on Tap

• USD Gross Domestic Product (Annualized) (4Q A) expectd at 3.0%
• USD Gross Domestic Product Price Index (4Q A) expected at 2.0%
• USD Personal Consumption (4Q A) expected at 2.3%
• USD U. of Michigan Confidence (Jan F) expected at 73.9

Price Action

• USD/JPY test 77.00
• AUD/USD rallies to 1.0650
• GBP/USD steady at 1.5700
• EUR/USD makes another run at 1.3150

With no economic data on the calendar, currency traders focused on Davos where EU commissioner for monetary affairs Ollie Rehn stated that Greek government and private investors were very close to an agreement on the restructuring of Greek debt. The comment helped fuel a small rally in EUR/USD lifting the pair to a high of 1.3150 in midmorning European trade.

The news of the resolution of the Greek crisis remains the key driver in currency trade and appears to be the primary catalyst for any further rally in the EUR/USD. Yesterday the pair failed to break past the key 1.3180 level when talks between Greek officials and private investors stalled.  Unofficial reports suggest that the contours of the deal revolve around a possible 70% haircut for investors and coupon rate of 3.75%. 

If a deal is announced before the weekend the EUR/USD could test the 1.3200 barrier on relief of the news. However, the prospect of failure remains quite real with some unofficial reports suggesting that Greek government has drawn contingency plans for an exit from the union.. Such a scenario would likely create a quick selloff in the single currency, but may prove to positive in the long run if it does not precipitate massive losses throughout the European finance sector. The true extent of exposure of European banks to Greek debt remains unknown and is the key reason for investor concern.

That concern is being expressed in the EUR/CHF pair which continues to trade near 5 month lows. As we wrote earlier, “The price action in EUR/CHF has been decidedly weak ever since the architect of the peg Philip Hildebrand, the former head of the SNB was forced to resign due to a possible insider trading scandal involving his wife. Ironically enough during this time macro economic conditions in the EZ credit markets have eased considerably as the ECB introduced its LTRO mechanism to add liquidity into the system.

The fact that the Swiss franc has continued its rally against the euro as credit spreads in the region have compressed, suggests that many investors continue to hedge their bets by seeking the safety of the Swissie. A break of the key 1.2050 level in EUR/CHF could trigger  a quick move towards 1.2000 as the market tries to test SNB’s resolve.”

In North America today the focus will be on US GDP data for Q4. Consensus calls are for a 3% print – a sharp rise from the 1.8% reading the quarter prior. If  the GDP data meets or beats the estimate it should help risk assets rally further as it will confirm the bull’s thesis that US recovery is gaining steam and could provide a powerful offset to the slowdown in Asia and Europe. The news could help stabilize USD/JPY which has now tumbled back to 77.00 in the wake of the Fed’s uber dovish statement on Wednesday. If however the GDP prints weaker than forecast the slide in USD/JPY could continue.           

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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.