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FX Headlines: Risk Aversion Resumes as European Leaders Struggle to Find Solution for Greece

FX Headlines: Risk Aversion Resumes as European Leaders Struggle to Find Solution for Greece

2011-05-25 13:43:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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The move to risk-aversion resumed in the overnight session Wednesday, with the Swiss Franc continuing what has been essentially an unimpeded battering against the Euro since the beginning of April. The British Pound, on data showing that net exports surged in the first quarter, also proved to be a strong performer in the overnight, despite other components of GDP suggesting that the country is indeed on the verge of a stagflating economy.

FX_Headlines_Risk_aversion_resumes_as_european_leaders_struggle_to_find_solutions_body_Picture_7.png, FX Headlines: Risk Aversion Resumes as European Leaders Struggle to Find Solution for GreeceFX_Headlines_Risk_aversion_resumes_as_european_leaders_struggle_to_find_solutions_body_Picture_1.png, FX Headlines: Risk Aversion Resumes as European Leaders Struggle to Find Solution for GreeceFX_Headlines_Risk_aversion_resumes_as_european_leaders_struggle_to_find_solutions_body_Picture_4.png, FX Headlines: Risk Aversion Resumes as European Leaders Struggle to Find Solution for Greece

Fundamental Headlines

Lagarde Declares Candidacy for IMF Head - Bloomberg

OECD Keeps Global Forecasts, Cautions on Deficits - Bloomberg

How Long Before Greek People Demand Default? - CNBC

$1 Trillion on the Table in US Debt Talks - CNBC

Debt Concerns Pound Euro to Record Low vs Franc - Reuters

EURCHF: The Swiss Franc was the strongest performing currency in the overnight session, gaining 0.73 percent versus the Euro, and 0.93 percent against the Australian Dollar. On Monday, I noted the shift to the state of risk-aversion; while yesterday stalled such a move, it is clear that such sentiment has retaken the market today. The U.S. Dollar was also up against higher yielding currencies, such as the Australian Dollar, Canadian Dollar and New Zealand Dollar. In fact, as it becomes clear that European leaders are finding it difficult to identify the correct way to address the sovereign debt crisis, with the European Union’s Jean-Claude Juncker stating yesterday that he would prefer a “soft restructuring” rather a default – a situation in which creditors would extend the repayment period on loans made to Greece in order to avoid taking a significant haircut on principal – and the European Central Bank’s Jürgen Stark pleading that a Greek default “cannot, must not be the solution,” the Euro could be on unstable ground in the coming weeks. In the month of May alone, the Euro has fallen across the board against the safe haven currencies, down 5.34 percent against the U.S. Dollar, 4.28 percent against the Japanese Yen and 4.07 percent versus the Swiss Franc. For now, with the fate of Greece’s Euro-zone membership up in the air, the Euro is likely to remain on rocky ground for some time.

Taking a look at price action, with the Euro-Franc falling to an all-time low, it’s clear that the pair could continue falling before establishing a floor. That being said, after struggling to break through and hold below its all time low of 1.2432 it established at the start of the year, the EUR/CHF pair was able to close below said floor on May 20. The pair remains at the range bottom of a shorter-term descending channel dating back to the turn of the year, and similarly at the bottom of a channel dating back to last July. The fundamental picture remains strongly in favor of further Euro-Franc weakness, so despite technical indicators suggesting a rebound higher could be on the horizon, it is unnecessary to consider a rebound yet until some substantial plans emerge for Greece.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

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