Forex report: Greek resolution up in the air

IB FX Brief: Eurozone resolve awaits Friday political agenda

Trading is slow to begin the session. Japan and the U.K. are both closed for business on Monday and the response to the weekend resolve between the IMF, the EU and Greece is still awaiting the outcome of a German political debate expedited by Chancellor Merkel to Friday. Until then the euro looks set to remain on the defensive with a fresh record short euro position hoping that the situation worsens.

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Euro – EU leaders reconfigured earlier plans to assist Greece and it appears that German demands for tougher domestic action by Greece have won through. While some parties didn’t like the idea of appearing incapable of solving Europe’s in-house problems, the inclusion of the IMF has perhaps offered German opposition to a bailout the leverage it needed to punish a Greek way of living well beyond its means.

The €110 billion ($145billion) three-year deal is likely to cripple the Greek economy meaning that it will grow slower than previously thought under the reduced spending and lower wage agreement. It won’t see its budget deficit fall beneath 3% of GDP now until 2014 – a year later than earlier thought. And while there is significant and understandable public opposition to the plans, Greece has little if any choice. One wonders whether the crowds in Berlin feel less irate as a result today.

Investors let the euro slide in response to the weekend revelations. EU ministers will meet to discuss a political timetable on Friday at the same time that German lawmakers will discuss the merits of the package. The fact that we have to wait around all week to find out whether the weekend measures are a go or not may well make for a slow week. The euro eased to $1.3242 and snapped a three-day gain against the yen at ¥125.04.

British pound – The pound is weakening to start election week. Britons are celebrating the May Day holiday today and its markets are closed. Weekend polls showed that the ruling Labor party is closing the gap against the Conservatives and may yet win the majority of seats. Outsiders sold the pound on the prospect of a hung parliament and the pound slipped against the dollar to $1.5258 from a close on Friday of $1.5300.

U.S. Dollar – A sharp rise in the dollar against the yen iced gains for the dollar index, which was already on the rise with gains for the dollar against the euro and the pound. A sudden pre-market acceleration away from ¥94.00 and towards ¥94.50 caught the market by surprise. Demand for the yen has been waning as investors embrace the notion of recovering stocks in an economic rebound.

Aussie dollar – Over the weekend the Australian government imposed a super-tax on its mining companies effective in 2012. This hurt the local stock market and the knee-jerk sales of domestic mining issues may have harmed the Aussie dollar, which had eased to 92.31 U.S. cents. However, as the U.S. equity market futures start to warm up the Aussie has rebounded and is currently trading at 92.72 cents. On Tuesday the RBA meets to discuss whether to raise policy by a further quarter point to 4.5%.

Markets currently imply a 60% chance of this happening and the stakes were earlier raised with the release of a Melbourne Institute gauge of consumer prices, which accelerated in April from 2.5% to 2.9%. Also weighing on the Aussie overnight was the third attempt so far this year by the PBOC to rein in bank lending. At the weekend the central bank raise the reserve ratio for its banks requiring them to hold more deposits at the central bank.

Canadian dollar – Having closed on a down note on Friday the loonie is rebounding this morning with the local dollar today buying 98.72 U.S. cents. With commodity prices generally firmer the resource-based dollar is finding more investors willing to buck the recent downdraft.

Japanese yen –Markets closed.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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