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Euro Approaches 1.300 as Progress on Greece Stalls

Last updated 2/6/2012 5:40 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Euro falls Greek deal not done for third week-end in a row
• Australian retail Sales miss but Jobs up
• Nikkei up 1.10% Europe off -0.75%
• Oil At $96.75/bbl
• Gold at $1719/oz.

Overnight Eco

• AUD Retail Sales s.a. (MoM) (DEC) -0.1% vs. 0.2%
• EUR Euro-Zone Sentix Investor Confidence (FEB) -11.1 vs. -14.8 eyed
• EUR German Factory Orders s.a. (MoM) (DEC) n/a
• GBP Halifax Plc House Prices s.a. (MoM) (JAN) 0.6% vs. 0.1%

Event Risk on Tap

• CAD Ivey Purchasing Managers Index s.a. (JAN)

Price Action

• USD/JPY at 76.70 in post NFP bid
• AUD/USD falls through 1.0700 as risk aversion increases
• GBP/USD falls below 5750 as risk sells off
• EUR/USD break below 1.3050 on disappointment over lack of Greek deal

The EUR/USD opened lower at the start of the week’s trading as negotiations on Greek debt restructuring failed to reach a definitive agreement for the third weekend in a row, with parties now deadlocked on the austerity measures required by the EU/ECB/IMF troika. With haircut provisions for private sector investors all ironed out, the major stumbling block revolved around the issue of further cuts in wages and pensions.

Some of the reforms required by the troika include 25% cut in private sector pay, 35% cull in supplementary pensions and closure of more than 100 public sector run companies which would no doubt lead to thousands of more job losses.  The New Democratic party leader  Antonis Samaras stated that “They are asking for more recession than the country can take.” The draconian cuts required by EU, ECB and the IMF may be politically unfeasible in Greece. A recent poll has shown 92% disapproval rating regarding the negotiations on the bailout with Greece’s two biggest unions set to hold 24 hour strike on Tuesday.    

The lack of progress on the deal and the general uncertainty surrounding the Greek bailout helped to push the EUR/USD lower by 100 points as the pair slid to 1.3030 in mid-morning European trade before stabilizing. Despite the deadlock in negotiations the market remains relatively sanguine about the prospect for a bailout believing that European officials will not allow Greece to go into a hard default that could spread turmoil throughout the region’s credit markets and trigger contagion risk in Portugal, Ireland and other periphery economies. 

This belief in an “11th hour deal” is the reason why the fallout in the euro has been relatively modest. Yet the longer the saga continues the more  uncertainty it will invite.  For now the EUR/USD has remained above the key 1.3000 level, but if it fall through the big figure it could precipitate a much larger wave of selling if the deadlock appears to be unsolvable.  The situation will then enter into uncharted territory  as Greece will face the prospect of hard default opening up the risk of massive counter party losses.     

Elsewhere Australian retail sales disappointed printing at -0.1% versus 0.2% but the string was somewhat offset by the better than expected Job Advertising data which rose by 6.0% from -0.6% the period prior. Tomorrow’s RBA rate decision remains an open question although the markets have priced in an 84% chance of a rate cut. Still some analyst feel that the RBA may remain stationary for another month given the relatively robust labor data and increases in PMI gauges. The unit fell below 1.0700 on overall risk selloff in early Europe, but remains well supported and should receive a strong boost if the RBA maintains rates at 4.25%  at tomorrow meeting.

In North America today the calendar is barren with the exception of the Canadian IVEY PMI report and currencies will likely take their cue from equity flows and further developments in Athens. The euro remains grossly oversold according to the latest COT data with shorts trimmed only by 16K contracts, so any news of progress from Greece could trigger yet another short covering squeeze but for now the bias remains to the downside.

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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.