Euro Rally Reverses As Fears Mount That Bailout Will Fail

I’ve been shortting the Euro myself since last week with my Zen trading specifically and I do expect this trend to continue in the intrem. This article by Boris Schlossberg from FX360 supports that position.

Top Stories

• Greece’s George Papaconstantinou confident of EU-IMF package
• UK LibDems Clegg – PM to us if Labor wants a deal
• Asia up strongly 2.0% Europe up 1%
• Oil at $85.20/bbl
• Gold  at $1158/oz. gaps higher on open

Overnight Eco

• JPY CSPI -1.1% vs. -1.3% eyed

Price Action

• USD/JPY  holds above 94.00 but little forward traction in overnight trade
• AUD/USD  strengthens to .9300 as risk appetite revives
• GBP/USD  1.5500 caps but holds tight at 1.5400
• EUR/USD  gives back most of the rally as Greeks bonds widen out again

After opening strongly at the start of week’s trade, the EUR/USD  gave back most of its gains as Greek bond spreads widened once again to 600bp+ to German bunds on trader concerns that the EU-IMF bailout deal  may not be ratified. Over the weekend Greek Finance Minister George Papaconstantinou stated that final terms and conditions of an aid package for Greece will be ready by early May and that it will be acceptable to all his partners in the euro zone, including Germany.  “We’re all confident that this will be done in time and that we will be able to finance Greek public debt without any problem,” he told a news conference.

As a result of his remarks, the euro rallied in Asian trade building up on its gains from Friday to reach a high of 1.3397. However, when Europe came on line the pair began to slip to 1.3300 as Greek bond yields once again widened out. The market remains uncertain about Germany’s commitment to the deal and more importantly traders are increasingly concerned that the logistics of the financing package will not be available in time for Greece to roll over its debt by middle of May.

If the bailout package meets stiff resistance in German legislature, the chances of an EU  currency crisis will doubt escalate and EUR/USD  could fall through the critical 1.3000 level a panicked selling pushes the pair lower. However, with EU officials aware of the gravity of the situation we doubt that they will allow the crisis to remain unchecked. If Ms. Merkel can force the approval through the Bundestag a lot of the pressure on the EUR/USD  will be relieved and the pair could stabilize at these levels supported by  improving economic fundamentals in EZ.

Meanwhile cable  was capped at the 1.5500 level as the spectre of hung Pariliament hangs over the currency. Over the weekend the LibDems leader Nick Clegg noted that if Labor wants a collation government it may have to allow LibDems to assume the Prime Ministership. As we noted earlier, “Some Labor party officials are coming to the pragmatic conclusion that   this may be the only way for the party to stay in power.  instead of being a problem a three way tie in UK elections could actually strengthen the political process by creating a unity government between Labor and LibDems that would provide a very healthy margin of victory in the Parliament and in turn would allow for quick and broad legislative action on the fiscal front. That thesis, of course, rests on the assumption that LibDems and Labor would be willing to negotiate in goodwill and would quickly come to terms on a deal for coalition rule.”

In North America today the calendar is barren so trading is likely to be driven by dynamics on the other side of the pond, as market participants prepare for the FOMC meeting this Wednesday which could reveal a more hawkish posture by the Fed.