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Pressures on the EUR

Last updated 10/11/2011 9:29 AM ET (GMT -5) 3 Comments

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Kathy Lien

Director of Currency Research, GFT

@import url(/css/cuteeditor.css); @import url(/css/cuteeditor.css); After Monday's strong rally, the euro and other high yielding currencies are trading slightly lower against the U.S. dollar this morning.  Once again, there are no major U.S. economic data on the calendar today but the minutes from the most recent FOMC meeting will be released Wed afternoon, and the details of which could draw the market's focus back to the U.S. dollar.  Until the minutes are released however, investors will spend most of their time thinking about Greece and the Eurozone.

On Monday, the prospect of a plan to support Greece and European banks sparked a healthy risk rally across the financial markets.  This morning, we have both positive and negative developments for the Eurozone. Starting with the good news, the Troika (EU, IMF and  ECB) have completed their review of Greece and expect to release their sixth tranche of aid in early November.  Although the Troika's assessment was grim, when Greece finally receives its next aid payment, a major near term uncertainty will be removed from the market, helping to ease CDS spreads, boost general market sentiment and hopefully the euro.  However even with more bailout funds, the EU/IMF could impose deeper haircuts for Greece on investors.  Back in July, they agreed to a 21 percent haircut but this morning, there are talks of a 40 to 60 percent haircut.  The prospect of incurring such deep loses is weighing on sentiment particularly after EU Juncker said even more losses is possible.  

Germany and France also agree that Greece needs to have their debt restructured in a way that could lead to a selective default leading investors to wonder whether this would trigger a CDS event. If it does, expect some major volatility in the financial markets and potential losses by CDS sellers.  If somehow a CDS default event is avoided, there will be plenty of people kicking and screaming but the volatility could be more moderate.  

Finally, Slovakia and Malta are the only 2 remaining countries left to approve the prior expansion of the EFSF.  The passage was suppose to be smooth but the Slovakian government complicated the scenario by tying the vote to a confidence vote, causing the euro to give up its gains.  This will make the vote more difficult to pass and draw out the process because if the vote is defeated, another one will have to be held.  It has been this much of a challenge to approve the expanded powers given to the EFSF back in July, imagine if the EFSF needed to be increased further - in reality that may not be approved until the second quarter of 2012.  

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Comments (3)

fxx

October 11, 2011 at 10:44 AM ET

Isnt minutes tommorow?

klien

October 11, 2011 at 10:47 AM ET

Yes, the Fed changed the date from Tues to Wed. Just got it

http://www.reuters.com/article/2011/10/11/diary-fed-idUSN1E75N0CX20111011

fxx

October 11, 2011 at 10:54 AM ET

:)

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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.