Greek debates on new austerity measures are underway, with a vote coming up mid-week. Meanwhile, EURUSD is caught in a nervous range. But let’s not forget this is also the week the US Fed’s QE2 ends.
EURUSD tried the lower end of the range and the rising line of consolidation top open the week in early trading, as sovereign debt spreads at the EuroZone periphery widened even further and risk was clearly off. But the early European session showed that the Euro is not ready to break out of the range just yet, as the spreads partially compressed again and the Euro turned sharply and rallied well over a figure off the lows.
The mood is very uncertain as the market mulls whether the Greek parliament will vote in favor of the new austerity package, dubbed the Medium Term Fiscal Strategy (MTFS) on Wednesday. This is the first immediate step toward near term stability for Greece, as it is assumed that the next tranche of the existing bailout plan would be disbursed upon approval of the MTFS since that plan was rubber stamped by the EU recently. Beyond that, EU finance ministers will be meeting this Sunday and on July 11 to discuss the next bailout plan for Greece. An interesting piece discussed by ZeroHedge looks at how the ECB and the markets might react if the Greek austerity package fails to get approval, which would throw everything into disarray: http://www.zerohedge.com/article/what-if-greece-says-no . Very interesting reading. The market, while fretting the situation, is still pricing a rejection vote at very low odds.
Meanwhile, Sarkozy has advanced a plan for French banks – which are the most exposed to Greek debt – to voluntarily rollover 70% of their holdings into 30-year bonds with a special interest rate. Of that 70%, 20% would bizarrely be linked to zero coupon bonds linked to “high-growth stocks”. Germany has expressed interest in the plan on its own banks’ behalf. Avoiding the declaration of a default and all it entails is the weakness of these kinds of plans, and Greece would still have to cough up the 30% at roll-over under such a plan. This looks like classic extend and pretend from where we sit.
The headline risk this week is severe, but the Wednesday vote is the most critical known event. Further out, assuming Greek passage, we’ll have to watch out for the potential of various efforts to disrupt the new bailout package.
QE2 to expire this week
Let’s not forget that the first four days of this week are the last four days of the Fed’s QE2 monumental bond buying program, which will mean the removal of - roughly - 80 billion USD per month of “liquidity”, or whatever one might choose to call it, from the system. There will still be a residual bond buying after Thursday that is driven by the Fed maintaining the size of its balance sheet on redemptions of mortgages, etc. One possible scenario for the end of QE2 is that the current round of dread/risk-off/USD up continues in the next couple of days ahead of the event but then yields to a buy the fact (buy risk sell USD) on Friday or early next week. This setup - and the USD picture in general - is likely to play out more purely in the likes of AUDUSD rather than EURUSD due to the difficulty here in separating the headline risk of Europe from flows driven by the fears over the implications of QE2 expiry.
Odds and ends
USDJPY continues to manage to trade above the key 80 area as rates have eased a bit higher at the front end of the US yield curve today on anticipation of this week’s treasury auctions (2-year today, more later this week ). As well, Moody’s was out grumbling about the lack of fiscal credibility after Japan failed to meet its original timetable on a long term plan for dealing with its public debt. Perhaps because there is no credible way to approach the problem, one wonders?
New Zealand’s May trade balance figure came out smaller than expected on a larger than expected import figure and one wonders if the “rebuilding from the earthquake” trade could begin to weigh on the kiwi as the “Chinese capital inflows” trade has possibly faded out. In any case, when risk is off as it has been lately, it is tough to build a bullish case for NZDUSD, which today is pressing on the psychologically significant 0.8000 level, just below the 55-day moving average, which was an important support level on the previous sell-off wave.
Looking ahead
Big event risks this week that are known (Greek vote and end of QE2) and the constant risk of random headlines on the sovereign debt crisis peppering traders from the EU could shake things around both ways as we have become accustomed to of late. The US treasury auctions this week are an interesting test of the bond market after its most persistent rally in years of late, particularly for USDJPY and possibly USDCHF, though CHF is more exposed to Euro sentiment. Watch out for the ad hoc risk of noise from the SNB or Swiss government on CHF strength this week – the franc is beginning to look scary for Swiss officialdom.
On the broader risk appetite front, it’s very relevant to watch the 200-day moving average in the S&P 500, which has twice been tested over the last several trading days. A close below that MA could open up a can of bearish worms for technicians and market timers. On the FX front, the risk barometer equivalent, AUDUSD, has broken its recent range and is trading at an 11-week low.
Chart: AUDUSD
AUDUSD is finally trading below the recent range today after plenty of evidence had been building for some time against the Aussie’s case, as we have pointed out, and after several feints that were initiall rejected. The move lower opens up to the 1.0260 area of the previous structural high. Any significant damage below that level would provide the first building blocks for the end of the bull market in the currency pair.
Exercise extreme caution in these markets.
Economic Data Highlights
- New Zealand May Trade Balance out at +605M vs. +1000M expected and +1148M in Apr.
- UK Jun. Hometrack Housing Survey out at -0.1% MoM and -3.9% YoY vs. -3.7% YoY in May
- Sweden May Trade Balance out at 5.7B vs. 6.0B expected and 4.0B in Apr.
- US May Personal Income out at +0.3% MoM vs. +0.4% expected
- US May Personal Spending out at 0.0% MoM vs. +0.1% expected
- US May PCE Deflator out at +2.5% YoY as expected and vs. +2.2% in Apr.
- US May PCE Core out at +0.3% MoM and +1.2% YoY vs. +0.2%/+1.1% expected, respectively and vs. +1.1% YoY in Apr.
Upcoming Economic Calendar Highlights (all times GMT)
- US Jun. Dallas Fed. Manufacturing Activity (1430)
- US Fed’s Kocherlakota to Speak (1500)
- US Fed’s Hoenig to Speak (1700)
- UK BoE’s Posen to speak in Scotland (1700)
- Japan May Retail Trade (2350)
- Australia RBA’s Debelle to Speak (0100)
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