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USD Up on Safe Haven Bid as Portugal CDS Price in Major Default Risk

Last updated 1/30/2012 9:27 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

With 10 year Portuguese bond yields above 15.5 percent and Italian yields above 6 percent, the EUR/USD's five day winning streak has come to an end. Europe is only halfway through its trading session but the only way this dynamic would change is if European Leaders suddenly announce a grand sweeping plan to increase the firepower of Europe's rescue fund. Unfortunately there is very little possibility that this would occur - EU Leaders are discussing the details of a fiscal compact and possibly what to do with Greece but no tangible results will be announced, leaving their next formal meeting on March 1st as the market's next hope for a deal. If Europe wants to avoid a tragedy in March, when Greece runs out of money, February needs to be a month where they put their nose down and do nothing but hammer out a plan to save Greece and to widen Europe's safety net. The urgency has now increased significantly because Portuguese CDS spreads are pricing in a 70 percent chance of a default. Europe cannot handle a simultaneously default of Greece and Portugal - this won't happen in reality but the mere possibility has been enough to drive the EUR/USD sharply lower. 

In fact, the intensification of Europe's troubles has driven investors back into the U.S. dollar, which is trading higher against all of the major currencies. Throughout the past week we have warned that the dollar could regain its legs quickly if investors suddenly grow nervous about Europe. Easy monetary policy and zero interest rates has not stopped investors from buying dollars in the past and with a significant amount of uncertainty still ahead for Europe, it has been no surprise to see the market ignore this morning's mixed U.S. economic reports. Personal income rose 0.5 percent last month which was stronger than expected. Personal spending growth was flat which is terrible news for the retail sector but incredibly good news for personal finances. Americans need to stop spending and start saving and this is exactly what the latest personal income / spending numbers imply. The core PCE deflator, a measure of inflation rose slightly by 0.2 percent. It is a busy week on both sides of the Atlantic but for the most part, we expect the U.S. to remain a sideshow to Europe. 

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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.