EU Open – Rally In Risk FX Fizzles

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Key Market Drivers EU Open June 18th, 2012:
Pro-Bailout Win in Greece but EUR/USD rally modest
Spanish credit remains under stress with yields rising above 7%
G-20 Next Focus for FX
Nikkei up 1.77% but Europe gives up early gains -0.50%
Oil at $83/bbl
Gold $1620/oz.

Asia/Europe Eco Data:
AUD New Motor Vehicle Sales (MoM) 21:30
2.4% vs. -1.0%
NZD Westpac Consumer Confidence 18:00
99.9 vs. 102.4
GBP Rightmove House Prices (MoM) 19:01
1.0% vs. 0.0%

North America Data on Tap:
USD NAHB Housing Market Index (Jun) 10:00

Another turbulent night of trade in the currency markets as EUR/USD gapped higher on the Asian open in reaction to the pro-bailout win in Greek elections only to give back all of its gains in morning European dealing. Much the relief of global capital markets the pro-bailout New Democracy party edged out the far left Syriza party. New Democracy won 29.7% of the vote compared to 26.9% for Syriza and together with Pasok it now holds 162 seats in the Greek Parliament obtaining a chance to form the next government.

However, investors remained cautious about the prospects to resolve the EZ credit crisis. Most analysts believe that despite the win by New Democracy, Greece will not be able to abide by the terms of the bailout and will eventually have to leave the EMU given its massive debt load and it wrecked economy. However, the election results delayed any immediate chance of exit and the country will now likely receive its next tranche of funds from Troika allowing it to function for the next few months.

Although the danger of “Grexit” appears to have diminished, currency investors remained wary about the broader EZ credit markets with peripheral bonds giving up their early gains by the start of European trade. The benchmark Spanish bonds rose above the key 7% level once again in a clear sign that investors remain concerned over the viability of Spanish debt. With the credit crisis now spreading to the much more important southern European economies of Spain and Italy, the Greek elections are being viewed as a sideshow to the much larger problems of the EU as a whole. A report by Spanish paper El Confidencial suggests that an independent audit of Spanish banks shows a capital requirement of 150 billion euros versus 100 billion originally eyed as the sector faces larger losses on retail mortgages.

For the time being the Greek elections results should serve as a modest point of support for the EUR/USD with the pair holding steady at the 1.2600 level. However, unless EZ officials move quickly to a more accommodative monetary policy and a serious discussion of a fiscal union, the relief rally in the EUR/USD will dissipate within days as credit concerns continue to depress the market.

Attention will now turn to the G-20 summit which could be the key driver of trade during North American session. Markets are clearly looking for some coordinated policy action from G-20 leaders as evidence of global economic slowdown continues to mount. However, we doubt the summit will produce any dramatic initiatives and a s result any rally in risk will likely be capped for the time being with 1.2550-1.2750 bounding the trade in the EUR/USD post Greek election results.

Boris Schlossberg
Managing Director

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