The Euro and Greece and Spain and Merkel and EcoFin

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By FX Empire Analyst - Barry Norman
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This morning in Asian equity markets are better inspired compared to the start of the week yesterday morning. The news headlines were not really growth and risk supportive with the IMF cutting its global growth forecast. At the same time markets are supported by comments from PBOC governor Zhou who said that the PBOC will make its policy more preemptive, targeted and effective. Hopes on more monetary accommodation pushed Asian stocks higher.

EUR/USD is gaining a few ticks. Later today, there are only few eco data on the agenda with little market moving potential. In the US, it will be interesting to see whether the NFIB small business optimism can confirm the recent improvement of the ISM’s If so, it might be a marginally positive for risk and for EUR/USD. Given the lack of eco data, the market focus will remain on Europe. There will be headlines after the meetings of the EU finance Ministers. ECB’s Draghi will speak (and confirm its commitment on OMT) before the European Parliament. German Chancellor Merkel will visit Athens and meet Greek PM Samaras. The latter will be a high profile media event. We don’t think that Merkel will really interfere in the talks with in the Troika on Greece. Nevertheless, the market apparently sees this visit as a good sign that Europe/Germany will finally prolong the funding for Greece.

The Eurogroup meeting didn’t yield any high profile news. Looking at the statements after the meeting, the tone on Greece was not that negative but an agreement within the Troika on how to fill the funding gap for 2013/14 remains subject a ‘thorough and robust’ debate. From a market point of view, we still assume that Greece shouldn’t be a big issue anymore for EUR/USD trading. The comments on Spain were less supportive. The finance Minister’s applauded the measures that Spain is taking and apparently ‘no one’ is pushing for a Spanish aid request anytime soon.

This analysis is subject to debate, but from a market point of view, today’s events shouldn’t be negative for the euro. So, yesterday’s low should provide decent downside protection. Markets will also look forward to the earnings season, but the impact from the results of Alcoa on broader market shouldn’t be overestimated.  The impact from the earnings season on global markets remains open to debate and might have some effect on EUR/USD. For now, we hold the working hypothesis that the downside of risky assets (and thus of EUR/USD) should be rather well protected by the Bernanke put and the intentions of several other central bankers to reduce economic tail-risk. So, in a day-to-day perspective, we look out to pick up the euro for return action higher after yesterday’s setback.

Today’s largest risk event will be news and press coverage from the EU, most importantly Spain and Greece, both of these countries are power kegs ready to go off, Greece is about out of money and Spain is about to fall off a financial cliff. Both leaderships love to see fireworks.

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