FX Spreads: Euro/Dollar Slips as Greece Calls for Second Election
Spread Betting 17 May 2012
The next month will be a battle between political will and economics.
European political will is being tested to its limit, with leaders continuing to insist that they want Greece to remain in the Eurozone. However, the likes of Mervyn King and our PM keep reminding them that a break up of the single currency is almost economically certain.
Over the past few years, politicians have been unwavering in their resolve to keep the currency union together. However, more recently, the likes of Merkel and Sarkozy, before he was ousted, had been at least discussing the possibility of a break up.
What is becoming more apparent each day is that the markets will simply not allow the likes of Greece to have their cake and eat it without paying.
The politicians are almost as deluded as many people in Greece, who think that the richer members of the Union will simply continue to throw good money after bad.
The Germans and the French remain reluctant to put more of their money on the table, either by using the ECB's potential firepower or by creating a Eurobond. However, this could make them the nemesis of the single currency that they are so desperate to keep in tact.
Risk aversion continues to whittle through the index markets and we were expecting to see the FTSE 100 open flat-to-positive this morning. However, the index has seen the sellers come in and, at the time of writing, the FTSE is at 5380, down some 25 points.
Fears of a Eurozone break up continue to build and we saw these fears reflected in the bond markets yesterday. The yields on 10 year Spanish debt spiked sharply higher and Italian yields hit 6%, although this morning they are both a little lower.
This is making spread trading investors even more nervous about the possibility of contagion and now Spain's Prime Minister is starting to change his rhetoric. He had previously stated that Spain would not require a bailout, but now he is admitting that rising bond yields are making it difficult for the country to fund itself.
In the absence of any economic data, all eyes will be on the Spanish bond auctions to see what yields investors demand to lend them short term cash.
The euro steadied itself yesterday as it became clear that the Greek public will have to go to the polls once again. The outcome of the vote should decide whether they can tolerate austerity and keep the euro, or decide to go it alone with the drachma.
Also buoying the single currency were encouraging words from Angela Merkel and Mario Drahgi, stating that they wanted Greece to stay in the Eurozone.
This morning, however, the euro/dollar market remains under pressure, with little sign that it wants to test the upside.
At the time of writing, the FX rate is at $1.2720, with near term support and resistance at $1.2700/675 and $1.2760/815 respectively.
In commodities trading, yesterday gold hit new lows for the year at $1,527 an ounce before staging a modest comeback to close at $1,540.
The precious metal initially saw downside pressure as Greek turmoil kept safe heaven flows going into the US dollar. However, the FOMC minutes hinted that, given the state of the global economy, the Fed was becoming more open to another round of easing. This sent the dollar down and gold up.
The price of crude oil continued its downward trajectory yesterday. Traders factored in further supply increases and diminished global demand.
US crude oil also fell as inventories increased by 2.1 million barrels against an expected increase of 1.4 million barrels.
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'FX Spreads: Euro/Dollar Slips as Greece Calls for Second Election' edited by SD, updated 17-May-12
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