The much awaited Greek election event went by relatively successfully. The Greek electorate awarded New Democracy, the pro-bailout party, with the largest percentage of their votes. While the ND still had to join forces in order to form a coalition government, the process was thought to be relatively within reach.
What probably interested investors worldwide was that the event risk, had the Syriza party won, did not materialise. The issue with the Syriza was that they had promised to negate the bailout terms – something that would have shaken the euro and the eurozone to the core.
Markets initially opened higher as the worst case scenario was averted, but optimism lacked the necessary impetus and soon started to give in. Equities in Asia closed in the positive in Monday’s early session. In the Forex markets as well the AUD/USD rose to five-week highs; while the EUR/USD marked three-and-a-half week highs, as the currencies perceived to be riskier (in this case the AUD and the euro) gathered support at the expense of the “safer USD” – further demonstrating that investors were in risk on mode and optimistic enough to take on some risk.
The initial rally early into Monday’s session was also the result of a re-alignment of investor positions that had opted to short (or simply sell) the positions held in those currencies perceived to be riskier – ahead of the event risk posed by last Sunday’s Greek elections. Once the announced result was not the worst case scenario these investors typically had to cover some of these short positions by buying back the originally sold currency.
The significant risk posed by the outcome of the Greek elections was also depicted in the measures taken ahead of the event. The Bank of England, for example, announced the activation of the extended Collateral Term Repo, a close variant of the ECB’s long term refinancing operation (LTROs), but with some differences. Rumours of joint G20 action also circulated the markets ahead of the weekend and the SNB reiterated it was ready to buy unlimited quantities in order to enforce the EUR/CHF floor of 1.20.
Risk aversion quickly made a comeback and Spain took back the focus as the nation’s ability to tap for new liquidity was significantly hindered, when benchmark 10-year yield bonds hit highs of 7.15 per cent as Spanish bonds sold off. Last Tuesday Spain auctioned off 12- and 18- month bills and despite the relative short term, it cost Spain an average yield of 5.074 per cent for the 12-month bill, significantly higher than the previous 2.985 per cent, while the 18-month bill attracted average yields of 5.107 per cent again higher than the previous 3.302 per cent.
Last Monday, the EUR/USD slipped to daily lows of 1.2557 after hitting highs of 1.2747 earlier in the session. Nonetheless while softer than what it was at week’s start, the EUR/USD managed to hold itself close to 1.26 levels ahead of the FOMC meeting late yesterday.
Speculators were betting that the chances of more easing from the FED were increasing, given the softer data and the expiring “operation twist” (which is due to expire around the end of June). Easing usually reflects negatively on the respective currency as it makes the US dollar supply cheaper and more abundant.
Within the coming week we expect the EUR/USD to hold mostly between 1.2511 – 1.2747, a break of 1.2816 is needed for a continued up trend. The 1.2363 – 1.2511 area should cap price moves lower while price moves higher should be resisted at the 1.2737 – 1.2816 area.
Late last week, apart from the additional liquidity measures indicated earlier, the BoE and the UK government announced that they would jointly be looking into boosting bank lending to the economy.
BoE governor said that he envisaged the scheme should be up and running in the coming weeks. Interestingly enough as well Governor Mervyn King also specifically said that “the case for further monetary easing is growing”.
For the former part of this week the GBP was an average -0.29 per cent weaker across the major currencies.
Against the USD the GBP gained around 1.84 per cent for the month, but against the euro it lost -0.36 per cent since the start of June.
Upcoming FX Key events:
Today: EZ PMI flash manufacturing, UK retail sales, and US existing home sales.
Tomorrow: German IFO Index and Canadian CPI.
Technical key points:
EUR/USD is bearish, target 1.2000, key reversal point 1.3000.
EUR/GBP is bearish, target 0.78 key reversal point 0.81.
USD/JPY is bearish, target 77.00, key reversal point 80.00.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Muscat is a senior trader at RTFX Ltd.