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EUR Up on Greek Deal but Gains Curtained by ECB Collateral Changes

Last updated 2/9/2012 9:48 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

Between the announcement of a Greek austerity deal and ECB President Draghi's press conference, there has been a lot of excitement in the currency markets this morning. The EUR/USD rose to fresh session highs following reports that the Greeks have finally accepted all of the reforms requested by the Trioka. However the relief rally in the EUR/USD would have been stronger if not for the ECB's plans to expand their collateral acceptance to riskier assets. Although Draghi grew more optimistic about the state of the Eurozone economy, the central bank still felt it necessary to widen their support. He said tentative signs of stabilization have now been confirmed and the region no longer faces "substantial" downside risks. But unfortunately, the central bank's plans to change collateral rules to include more trivial assets capped the gains in EUR/USD. As Draghi admits, the decision was not unanimous and will require stringent risk management because the ECB is playing with fire. The decision was clearly aimed at allowing more collateral to be posted for this month’s LTRO.

Although the ECB is adding more risk onto their balance sheet, EUR/USD traders are relieved that a major uncertainty has been lifted and if everything goes smoothly, Greece will receive bailout funds just in time to avoid default. Before getting too excited however, its important to remember that there are still a few hurdles to clear before the funds can be released. The Greek and German Parliaments have to vote on the full package - but we expect the votes go smoothly because it would be a major embarrassment and setback for everyone if the plan was rejected. 

Later this morning, Eurozone Finance Ministers will be holding an emergency meeting where they will move forward on the process of unlocking bailout funds. Draghi refused to comment on how the ECB will handle their Greek bond holdings because he wanted to discuss it with the Eurogroup first. We expect the ECB to forgo profits on their bonds by selling it to either the EFSF or Greece at their original purchase price. With a major LTRO operation set for the end of the month, the prospect of continued liquidity and cheap money should keep credit markets supported and the EUR/USD bid. For the time being, the EUR/USD is struggling to break above 1.33 but if and when the bailout funds are released, the EUR/USD will be trading closer to 1.35.

Meanwhile weekly jobless claims in the U.S. continue to decline. For the week of February 4th, claims fell to 358k from 373k, which is just a hair above 3.5 year low. The four week moving average dropped to 366k while continuing claims rose slightly to 3.515 million. The jobless claims report is consistent with a gradual improvement in the labor market but the Federal Reserve's lack of faith that the improvements will be sustained downplays its significance.

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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.