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FOREX: Euro Outlook Bearish Regardless of Greek Fiasco Outcome

By , Currency Strategist
08 February 2012 08:35 GMT

Talking Points

  • S&P 500 Futures Rise, Hinting Markets Continue to Price in Greek Bailout Accord
  • Yen Slumps as WSJ Article Claims BOJ Likely to Continue “Stealth” Intervention
  • Euro Outlook Remains Bearish on Economic Growth, Monetary Policy Expectations

The Japanese Yen underperformed in otherwise quiet overnight trade, down as much as 0.5 percent on average against the major currencies. The selloff began early in the session on the heels of a Wall Street Journal article arguing Japan’s “stealth” approach intervention revealed yesterday may be a template for recent and future. While all eyes were on the acknowledged intervention on October 21, the Ministry of Finance revealed yesterday that it sold $13.3 billion-worth of Yen in early November via a small group of commercial banks to stabilize the exchange rate.

While big-splash forays into the FX market on the part of Japanese authorities have failed to produce lasting results, the clandestine management of the exchange rate seems to have worked. Indeed, USDJPY has remained firmly locked in a tight range and volatility has dropped off considerably over recent months. All this has occurred even as the Eurozone debt crisis continued to rage on, which would previously have been expected to drive haven-seeking capital into the Yen and force a confrontation between the authorities and speculators. The article argues that this suggests stealth intervention has continued and will do so in the future.

Looking ahead, the spotlight turns back to Greece. Prime Minister Lucas Papademos is once again set to meet with ruling coalition party leaders to decide if they were prepared to sign on for more austerity – which the troika demands in exchange for an additional tranche of aid – to avert a default looming as soon as March 20 when €14.5 billion in debt is due to mature. The meeting was postponed for a second time yesterday after an initial deadline of 10:00 GMT Monday.

For their part, traders have apparently concluded that Greek politicians have no choice but to strike an accord with the so-called “troika” of the ECB, the EU and the IMF, judging that the political fallout from a default would prove more costly than public discontent over deeper fiscal retrenchment. Shares pushed higher on Wall Street yesterday and continued higher in Asia today while the Euro hit the highest levels in two months amid optimism that a deal would be announced in the near term.

European and US stock index futures are pointing firmly higher, hinting more of the same is ahead. To some extent, traders’ sanguine outlook makes some sense. While it seems like wishful thinking to assume a deal will be done, the fallout from a failure may not prove to be as ominous as it seemed as recently as 6 weeks ago. Greece’s total government is estimated at around €300-350 billion; EU banks borrowed close to €500 billion via the ECB 3-year LTRO in late December, meaning no banks are likely to fail (thereby returning the markets to the turmoil of 2008) even if a default transpires. On balance, it seems the larger question is how quickly the Euro advance falters as the spotlight shifts from Greece back to the dismal outlook for growth and interest rates. With the European Central Bank holds its policy meeting this week, so chances are the banks won’t have to wait too long.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

23:50

JPY

Bank Lending Banks ex-Trust (JAN)

0.7%

-

0.5%

23:50

JPY

Bank Lending incl Trusts (YoY) (JAN)

0.6%

0.6%

0.4%

23:50

JPY

Current Account Total (¥ ) (DEC)

303.5B

340.1B

138.5B

23:50

JPY

Adjusted Current Account Total (¥ ) (DEC)

752.3B

625.3B

480.4B

23:50

JPY

Current Account Balance (YoY) (DEC)

-74.7%

-71.2%

-85.5%

23:50

JPY

Trade Balance - BOP Basis (¥ ) (DEC)

-145.8B

-135.0B

-585.1B

0:01

GBP

BRC Shop Price Index (YoY) (JAN)

1.4%

-

1.7%

4:30

JPY

Bankruptcies (YoY) (JAN)

-5.4%

-

-6.3%

5:00

JPY

Eco Watchers Survey: Current (JAN)

44.1

47.4

47

5:00

JPY

Eco Watchers Survey: Outlook (JAN)

47.1

45.5

44.4

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

6:45

CHF

Unemployment Rate (JAN)

3.5%

3.3%

Medium

6:45

CHF

Unemployment Rate s.a. (JAN)

3.1%

3.1%

Medium

7:00

EUR

German Exports s.a. (MoM) (DEC)

-1.0%

2.5%

Low

7:00

EUR

German Imports s.a. (MoM) (DEC)

1.0%

-0.4%

Low

7:00

EUR

German Current Account (€) (DEC)

15.2B

14.3B

Low

7:00

EUR

German Trade Balance (€) (DEC)

13.7B

16.2B

Medium

7:30

EUR

Bank of France Business Sentiment (DEC)

96

96

Low

7:45

EUR

French Central Gov Balance (€) (JAN)

-90.8B

-97.2B

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3143

1.3207

GBPUSD

1.5821

1.5981

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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08 February 2012 08:35 GMT