Germany and its EU partners continue to clash over financial aid for Greece. While German Chancellor Angela Merkel continues to urge Athens to solve its debt problems alone, others like Italian Prime Minister Berlusconi are strongly backing EU support. The 16-nation eurozone is divided over whether or not to provide financial aid to Greece and how.
Greece continues to struggle with soaring debt and deficits, which has driven the currency bloc into the deepest crisis of its 11-year existence. On Monday, European Commission President Barroso called on Ms Merkel to look past domestic politics and agree on a financial safety net for Greece or risk causing harm to their common currency. Ms Merkel is facing strong opposition domestically to any bailout. She insists that there was no need to discuss an aid mechanism at an EU summit starting today, since Athens had not sought help and it could only be a last resort in case of imminent insolvency.
However, Ms Merkel's stance pits her against Brussels and major European partners, who favour strong action to end a speculative assault on Greek assets that has made it twice as expensive for Greece to borrow as for Germany.
The Greek Prime Minister George Papandreou told Parliament he was not seeking money but support to implement reforms. On the other hand, Greece's deputy PM Theodoros Pangalos accused Germany of allowing its banks to take part in a "deplorable game" of speculating on Greek bonds while German exporters profited from a weaker euro due to Athens' budget problems.
Since the start of the Greek crisis, the euro has suffered heavy losses against its major rivals. It is has lost almost three per cent so far in 2010 against the US dollar, while suffering much heavier losses to the commodity currencies, such as the Australian and New Zealand dollar, where it is down 27 per cent and 20 per cent, respectively.
There is a new development in the market concerning monetary policy. Investors are starting to believe more and more that the Fed will become more hawkish and might start to raise interest rates while the ECB will become more dovish and will keep rates low for longer. The reason for this is that market forces are pushing countries such as Greece and Ireland but also Portugal and Spain to cut budget deficits and withdraw stimulus packages that will push the eurozone into deflation. This is in contrast to the US where there is little political will to tackle the more than 10 per cent budget deficit, which on the other hand, will help to create jobs and will push the Fed to raise interest rates.
This divergence is bearish for the euro/US dollar as yields will be much more attractive in the US vis-à-vis the EU. Therefore, my advice is to look a bit beyond the ''noise'' that is currently happening about the format of the help that ultimately will be provided to Greece and assess the implications in the longer term.
The fact that there is more pressure on European countries to implement austerity measures will keep interest rates low which will keep the pressure on euro/US dollar intact.
Upcoming FX Key events
Tomorrow: US Annualised GDP, Core PCE & Michigan Consumer Sentiment.
FX technical key points
EUR/USD is bearish, target 1.3000, key reversal point 1.4200
USD/JPY is bullish, target 98, key reversal point 85
GBP/USD is bearish, target 1.4750, key reversal point 1.5700
USD/CHF is bullish, target 1.1000, key reversal point 0.9950
AUD/USD is bearish, target 0.7800, key reversal point 0.9400
NZD/USD is bearish, target 0.6200, key reversal point 0.7650
Mr Bovay is senior trader at RTFX Ltd.
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