FX Price Action

The euro traded down to about $1.3143, which has not been seen in nearly a year. Although it found a bid there as news wires announce a number of official press conferences in Europe as officials try to calm market anxiety that the EU/IMF negotiations with Greece may include a debt restructuring. Recall that when S&P slashed Greek’s ratings yesterday, it ascribed a level 4 to its recovery rate, which means that bond holders may see a return of only 30-50% of their investment. The euro did trade higher initially in Asia, reaching a high of almost $1.3220. We expect the euro to continue to be sold into bounces. Above $1.3220, look for offers in the $1.3250-70 area to cap the upside. On the downside, there has been talk of good demand for short-dated euro puts struck near $1.30.

Sterling’s losses have accelerated after being turned back from the $1.55 ceiling. It is trading at a three-week low today. The break of $1.52 is potentially significant as that area corresponds to the neckline of a double top and would project losses toward $1.49. We also note that the 5-day moving average is moving below the 20-day moving average for the first time since earlier this month, further underscoring the erosion of the technical tone. While the risks of a coalition government have been appreciated for some time, the broader economic context is changing and ten days to form a new government, as a British paper suggests is less acceptable now given the accelerated pace of events. In addition, many observers and investors fear that given the UK’s finances, it is vulnerable to a Greece-styled contagion.

Meanwhile, the yen is not seeing follow through buying today. The dollar has held above JPY93.00. However, as North American dealers return, the dollar is over-extended as it approaches the JPY94.00 area. Although the market talk suggests that yen demand yesterday was a function of safe haven demand, we are less convinced. Yen strength seemed to be more a function of short-covering than outright buying. The long-legs of the popular yen carry trades, like the antipodean currencies, South African rand, Brazilian real and Indonesian rupiah were sold-off and this required the backing back of the short yen financing positions. Strong March Japanese retail sales (+0.8% in March for a 4.7% year-over-year rate, the highest strongest in 13 years) overshadowed by market position adjustments. With the European situation far from resolved, operators may be a bit reluctant to jump back into short-yen carry trades. That said, only a move above JPY94.30 would suggest a resumption of the dollar’s advance. We are more inclined to see a pullback into the JPY93.00-40 area in near-term.

Talk that Greece could drop out of the EMU, devalue and then re-enter is a non-starter. Are we really expected to believe that Greek business and consumers would simply adopt the new currency whose sole purpose is to be debased? This would seem to be a recipe for an even larger disaster. The recent data from Greece suggests that there was capital flight of nearly 8 bln euros in the Jan-Feb period this year. The irony here is that that is roughly the May 19th maturity and coupon payment that needs to be financed and that is also roughly what Germany seemingly committed to as part of the EU/IMF backstop facility.

The latest official suggestion of the course of events is that the IMF/EU/ECB finish negotiations with Greece this weekend, with a votes in the Germany parliament over the course of the next week and all in time for Greece to have funds in hand on May 19th. The Financial Times reports, though the source is not clear, that the IMF is considering boosting its contribution to the backstop to 25 bln euros from 15 bln euros. One practical difficulty is that the dramatic backing up of interest rates for a number of European countries raises the cost of the financial support for Greece.