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FX: Hope Replaces Fear but Skepticism Reigns

Last updated 9/26/2011 10:19 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

As New Yorkers, our natural inclination is to be skeptical. However as humans, we always want to be hopeful and today hope replaces fear in the markets as investors latch onto a story about a nearly 2 trillion dollar deal that would put an end to Europe's sovereign debt crisis. Yet it is hard to be optimistic when the structure of the Eurozone itself and EU Treaty prevents swift solutions to a growing problem. Over the weekend, comments from European officials suggested renewed urgency within the region to contain the mess and prevent contagion. Everyone is starting to realize that a Greek default is not only possible but also probable and given the impact it would have on banks in Europe and financial markets around the world, it is time to stop playing around with the BB guns and bring out the bazookas. According to an article in the U.K. Telegraph, a three pronged Eurozone deal brokered by the G20 group of nations would provide blanketed support for Greece, Portugal and Ireland. A trillion dollar plus deal that reminds everyone of the stimulus provided after the G20 London Summit in April 2009 is exactly what Europe needs. However whether this new bailout program comes to fruition remains to be seen particularly since a number of additional options are also on the table. This includes increasing the size of the EFSF, allowing leverage for the fund through an ECB credit line or access to the ECB's repo facility - all of which would have a more limited impact on the euro than a trillion dollar deal. Yet given how long the Greek Saga has gone on for, the pullback in the EUR/USD in the early NY session suggests that investors are not buying into the idea that the Europeans will agree on grand sweeping rescue plan for the region. October 3rd is the next big day to focus on. Greece expects to receive the greenlight for its next tranche of aid on October 3rd but Germany does not believe that a decision will be made that quickly. If Greece fails to receive more aid by mid October, they would be forced to default. In fact, the UK Telegraph article assumes an "orderly" Greek default on at least some liabilities.

Meanwhile the outlook in the U.S. does not provide any cause for optimistm. New home sales fell 2.3 percent in the month of August. The larger than expected moderation in demand marked the fourth consecutive monthly decline in new home sales. The number of units sold dropped to 295k, a 6 month low. The details of the report showed particular weakness in the Northeast and West with prices falling an average of 8.6 percent across the nation in August. The decline in new home sales is at odds with the rise in existing homes which suggests homeowners may be more flexible with their terms than builders. Either way, the new home sales report reinforces the overall weakness in the U.S. housing market. With talk of the U.S. economy entering another recession, we do not expect any major improvement in demand for new or existing homes in the near future. 

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.