Greek Referendum, Dovish RBA Siphoning Risk-Appetite from Markets

Fundamental Headlines

• Greek Vote Gamble Said to Stun Euro Partners – Bloomberg

• MF Global Probe May Involve Hundreds of Millions in Funds – Bloomberg

• NYSE Invokes Rule 48 in Face of Expected Volatility – Reuters

• Wall St Falls After Greek Referendum Call – Reuters

• Azumi: Japan in War of Nerves – WSJ

European Session Summary

The news late yesterday that Greek Prime Minister George Papandreou would seek a vote of confidence this week as well as call for a referendumon the most recent Greek bailout sometime in the next few months has destroyed investor confidence created by the Euro-zone summit. The embattled Greek prime minister will face a vote of confidence expected to begin tomorrow and end on Friday, but the early signs are not looking good. His party’s Socialist Deputy has called for him to step down and be replaced while Papandreou’s health minister has publicly chastised his position on a referendum. And, making matters worse, three of his party’s members of parliament stepped down today, eliminating the ruling party’s majority. Markets have not taken kindly to this news.

Ahead of trading in New York, European equity markets were down in the range of 5 to 7 percent, while the German 10-year Bund, the equivalent to the U.S. 10-year Treasury Note, had its largest single day advance ever. Following in the risk-off trend, currency markets were showing equal signs of distress, with the U.S. Dollar outperforming the majors for a second consecutive day, cumulatively up 1.2 percent today and 3.1 percent the past two-days against the Australian Dollar, the British Pound, the Euro and the Japanese Yen.

EUR/USD 5-minute Chart: October 31 to November 1, 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The recent news out of Greece is a direct threat to the stability of the Euro-zone. While it remains that France is the lynchpin to the Euro-zone staying together – if the country is unable to help finance further bailouts due to a potential ratings downgrade – Greece has been the surprising impediment to saving the Euro. At this point in the process, markets have been assuming that the Greek government would continue to cooperate with other European leaders; markets are clearly taken aback by the fact that the Greek government is only now fighting for its sovereignty after months of ceding power to the greater European state. If the current Greek government falls, a frightening hypothetical ‘endgame’ scenario becomes a plausible reality: will Greece stay in the Euro-zone, and what will happen to the other PIIGS?

AUD/USD 5-minute Chart: October 31 to November 1, 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The net result has been a U.S. Dollar that is trading over 200-pips stronger against the Aussie and the Euro. Fears of a liquidity crisis are indeed emerging, with the U.S. Dollar finding bids across the board. The MF Global tribulations coupled with rumors of other primary dealers heading under has created a necessity for the world’s most liquid currency, helping boost the U.S. Dollar the past few days.

Coupled with the news out of Greece was a dovish Reserve Bank of Australia rate decision last night, in which the key interest rate was cut to 4.50 percent from 4.75 percent. The central bank’s commentary ensuing the decision indicated that there are indeed fears of a global slowdown, perhaps stemming from the Euro-zone crisis, and that inflationary pressures have subsided enough to warrant a rate cut. Such a move decreases the attractiveness of the Aussie, as it has a lower actual yield going forward. Given the shift to risk-aversion on developments out of the Euro-zone and the Reserve Bank of Australia decision, the AUD/USD has moved and looks to continue to trade back towards parity in the coming days.

24-Hour Price Action

Key Levels: 13:10 GMT

Thus far, on Tuesday, the Dow Jones FXCM Dollar Index is much higher, trading at 9778.36, at the time this report was written, after opening at 9658.26. The index has traded mostly higher, with the high at 9799.48 and the low at 9651.56.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

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