Greek crisis weighing on euro

IB FX Brief: Challenges in Athens weigh on euro

The groundwork for the next loan installment to Greece has been prepared and its barriers have been removed in Brussels and Berlin. But the euro begins another week of uncertainty as the logjam now appears to be in Athens. A slump in the euro currency last week predicated on a division between the ECB and Germany over whether private creditors of Greece should be strong-armed into shouldering the burden was resolved ahead of the weekend when Chancellor Merkel eased her nation’s demand. Investors rallied around the euro in relief that authorities might finally be on the same page. However, hundreds of miles away from the Berlin negotiations between European leaders trying to isolate the region’s currency from the crisis, the situation was worsening in Athens where anti-austerity protesters built up a substantial street presence refusing to leave.

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Euro – If Greece wants to receive the fifth installment of its 2010 financial bailout package its Parliament must mandate €78 billion in budget cuts and approve the sale of state-owned assets. That’s the price tag of earlier dishonest accounting that provided a sweet ride for the nation of Greece on the Eurozone’s luxury yacht. Last spring its partners agreed to provide €110 billion in loans to catch its freefalling economy but with harsh terms attached. Tiring of its austerity measures needed to fit those terms, opposition leaders last week called for fresh elections while some of Prime Minister Papandreou’s own party are defecting. Last week he set off a three-day vote of confidence that may yet result in his loss of power. And so there is understandable tension in the currency market on Monday as investors swiftly conclude that recent squabbles over the role of private bondholders now seems to play second-fiddle to whether Greece wants any further part in an increasingly ugly game. The euro fell to $1.4191 in European trading leaving behind Friday’s gleeful $1.4339 peak.

U.S. Dollar – As uncertainty rages over the endgame surrounding the financial outcome for Athens the dollar is rising. Investors are legitimately raising questions over how ugly a Greek default might look. That could happen within or outside of its membership to the monetary club, but recent warnings over its eventuality and the glaringly obvious desire of its people to follow an altogether other route, has investors raising their defenses. Commodity prices are falling in response to not only a gain in the value of the dollar but also prospects for further economic weakness stemming from potential Greek default. The dollar rose to 75.28 on an index basis. Later this week the minutes of the latest FOMC meeting might provide deeper insight into the thought process at the Federal Reserve as the second round of quantitative easing comes to an end.

British pound –The pound reversed its earlier loss against the dollar after British Chancellor Osbourne confirmed that Britain won’t become embroiled in discussions over Greece. An earlier stumble for the pound saw it decline to $1.6109 before it rallied to $1.6195. The pound managed to rally against the euro, which today buys 88.06 pence.

Aussie dollar – The Aussie fell hardest in response to growing risk aversion sliding against the dollar to $1.0496 cents. We’ll learn more about the thoughts of the Reserve Bank on Tuesday when the central bank releases the minutes from its June meeting. Its policy statement at the time appeared to put policy on hold, while more recent comments from its Governor point to a resumption of monetary tightening. The challenge for the Aussie in maintaining its yield cushion over the dollar is the real threat to global growth in the event that Europe’s headache worsens. A Greek default will undoubtedly create a repeat of Lehman’s 2009 failure and would have investors looking to monetary loosening from the world’s central bankers in order to couch confidence.

Japanese yen – The yen weakened following an unexpectedly strong contraction in exports proving that the economy is facing a hard time pulling itself out of recession following the March disasters. The Japanese currency reached a session high against the dollar at ¥80.02 before the trade data while growing risk aversion saw it slip further to ¥80.36.

Canadian dollar – The Canadian unit remains weaker on slumping risk appetite and is feeling the additional weight of the lowest price for crude oil in four months. The July crude contract remains below $92 per barrel as investors grow concerned about ample supplies and ailing demand. The loonie traded recently at $1.0178 U.S. cents.

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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