Greek Bonds Reverse, Push European Currencies Lower

Currency in Crisis

Greek bonds, which had begun the day recovering from yesterday's dramatic slide, have reversed. This is weighing on the already vulnerable European currency complex. The euro has been pushed below yesterday's lows. The next target is seen near $1.3270. Sterling tested yesterday's lows near $1.5130 and thus far it has held. A break, however, would likely see a move toward last week's lows, seen just below $1.49.

The yen, in contrast, is seeing board cross rate gains and this is helping keep Japanese unit steady against the firm greenback. Canada is remains firm, but some of the earlier upside momentum has faded and the Loonie is straddling parity.

We noted in the North American Currency View that in the dynamic situation, the cost-benefit analysis of default may be shifting and it seems others are also paying attention to this risk. According to Bloomberg data, the prices of sovereign credit default swaps show that in the past 24 hours or so, the risk of a Greek default has surpassed Latvia, previously the highest risk of default.

To be sure, we are not saying that a default is imminent. We are simply point out that as Keynes observed after WWI, there is a limit to any country's willingness pay foreign investors. Greece does not appear to have reached that limit. However, the market is finding little succor in Greek official claims that this month's funding has been secured. Given market conditions, the market is skeptical of Greece's ability to fund next month's maturity and coupon payment.

The absence of other focuses for fx traders in the early going today will ensure players stay riveted to the Greek bond market. It seems like it is the only news that matters today.