Euro Retreats as Greece Fears Return, Aussie Dollar Sold on Rates View

Talking Points

• Euro Retreats from 2-Month High as EU Withholds Greek Aid
• Australian Dollar Sinks on RBA Rate Cut Bets, Chinese Trade Data
• US Dollar Aims Higher as S&P 500 Futures Point to Risk Aversion

The Greece bailout fiasco appeared resolved after the warring factions in the coalition government finally agreed to accept additional budget cuts in exchange for €130 billion in additional aid. Confidence was quickly shattered anew however after Eurozone finance ministers opted to withhold the funds until the new austerity measures are ratified by a parliamentary vote. Such smug behavior reinforces our expectations that regional policymakers are now prepared to let Greece fail if their demands are not met. Indeed, Athens can no longer hold the region hostage after the ECB lent banks enough capital via December's LTRO to ensure a credit squeeze would be averted even in the event of a default.

The safe-haven US Dollar and Japanese Yen pushed broadly higher while the Euro retreated from a two-month high following the announcement. The Australian Dollarunderperformed as a disappointing batch of economic news compounded Eurozone-linked pressure on overall risk appetite. The Reserve Bank of Australia lowered its 2012 outlook for economic growth in its monthly policy statement, saying it sees scope for additional interest rate cuts if the demand falters. The bank added that economic growth outside the resource sector has been “below trend” and warned that it expects a further increase in the jobless rate this year. An ominous set of Chinese Trade Balance data reinforced the RBA’s message. Imports plunged 15.3 percent from a year before in January, marking the largest drop since August 2009 and pointing to fading demand from Australia’s top trading partner.

Looking ahead, the Greece issue will likely to exit the spotlight as it becomes increasingly clear that the newfound cavalier attitude of EU officials reflects the substantially reduced systemic risk that a default there now poses. Meanwhile, worries about the outlook for global economic growth present a stronger and far more persistent headwind for risk appetite. Indeed, the most recent flare-up in Eurozone debt fears obscured the fact that economists’ median world GDP expectations for 2012 have been sinking precipitously since early August. This theme appears ready to reemerge and promises to broadly boost the US Dollar in the week ahead. S&P 500 stock index futures are under heavy pressure in late Asian trade, hinting the markets may see a preview out this dynamic in the final hours of the trading week.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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

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