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FX: Waiting for Greece, US Home Sales Miss but Moving in Right Direction

Last updated 1/20/2012 10:05 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

After a week of optimism, investors are finally starting to become nervous about the euro. In the minds of the market, today is the do or die day for the Greek PSI talks. Greek officials and European sources have promised to reach a deal by the end of the day, giving Euro-area Finance Ministers an opportunity to discuss the finer points in Brussels on Monday. However as the clock ticks, a Greek debt deal is becoming more and more elusive. The Institute of International Finance, who represents private sector bond holders has apparently agreed to a coupon rate of 4 percent that would rise over time as the Greek economy improves. A coupon rate below 4 percent is a big win for Greece and would represent a major concession by bond holders who have argued that a coupon rate less than 4 percent would improperly compensate them for the 50 percent haircut. For Greece however, it would be a major breakthrough in negotiations because the coupon payments become much more affordable. At stake is their next aid payment - if a deal is not reached, the EU and IMF may refuse to release to Greece its next tranche of aid, which would not only be immediately bearish for the euro, but also push the country into default. The single biggest risk for the EUR/USD today is the Greek PSI talks. If the talks break down, 1.30 could prove to be the impenetrable wall for the EUR/USD but if the talks are successful, 1.30 would be cleared easily. 

Across the pond, existing home sales in the U.S. rose 4.61M in December, up 5.0 percent from the previous month. Home sales were slightly weaker than expected but still relatively firm and the most encouraging aspect of the report was the rise in prices. Inventory is starting to move and home owners are beginning to feel more confident about asking more - which is a healthy trend for the housing market. However the labor market needs to stabilize before the housing market can fully recover. The heydays of the housing market are far behind us and it will be a long tough road to recovery. In fact, we still believe that housing will remain depressed for most of the year and the only way the Federal Reserve can help is by keeping interest rates low and monetary policy easy. Earlier this morning, Canada reported a sharp decline in consumer prices. CPI fell 0.6 percent in December while core prices dropped 0.5 percent due to lower gas and auto prices. With wholesale sales also declining, we can understand why the Bank of Canada has grown less optimistic about the outlook for the Canadian economy. Softer inflationary pressures with keep the central bank from raising interest rates in the first quarter. 

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Comments (1)

FxP

January 20, 2012 at 11:36 AM ET

Kathy, maybe you can explain why AUD feels so good today despite the fall in copper? Thank's a lot...

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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.