Greek Contagion Spreads as Trichet Heads to Germany

The Euro has its biggest one day decline in a year yesterday as the debt crisis intensifies and the approval of the Greek bailout might be increased by 25 billion euros. The EU is also starting to plan the potential aid packages to indebted countries in the eurozone.

Jean Claude Trichet and Dominique Strauss-Kahn will show a unified EU and IMF front when they speak to the German parliament to request their approval of the Greek aid package. Germany is the biggest contributor to the bailout. German Chancellor Angela Merkel said that she won’t release the aid funds to Greece until that nation has a sustainable plan to significantly reduce its budget. This comes after the unpopularity amongst German people regarding the aid package and the potential for the crisis to spread with more aid being needed.

Comments from an interview by the German Finance Minister where he mentioned that the aid package to Greece can still be rejected have hit on the hopes of the Greek PM to receive the aid before the country enters into a default to creditors. The problem for Germany is not Greece, but what its default could trigger, likewise does supporting an aid package put them on the hook for more countries requesting a bailout.

The US$ is mixed in the O/N trading session. Currently it is higher against 8 of the most actively traded currencies in a ‘whippy’ trading range. The USD$ is higher against the JPY-0.10%, GBP -0.14%, and lower against EUR 0.07%, CHF 0.07%. The commodity currencies are stronger this morning, CAD 0.10%% and AUD 0.46%%. The loonie continues to hover close to parity as the European debt crisis spreads, but the drop in commodities has depreciated the Canadian currency since yesterday. The drop in commodities also affected the AUD even as the market expects the RBA to increase rates in their next meeting in May urged by inflationary pressure (0.9209).

Forex heatmap

Crude is lower in the O/N session ($81.86 down -58c). US Dollar strength has put downward pressure on oil as an alternative investment, as well as forecasts pointing to an increase in inventories. The combination of US Dollar strength and US growth weakness paints a negative picture for crude demand. Equity markets in Europe were falling and are taking commodities with them.

US Dollar strength has reduced the appeal of Gold as an alternative investment even as inflation signs around the globe have given Gold ($1162.90) some of its luster back as a hedge. Palladium fell 50 cents after it reached a new two year record level as there is a growing demand from automakers in China.

The Nikkei closed at 10,924.79 down -287.87. The DAX index in Europe was at 6,062.52 down -96.99; the FTSE (UK) currently is 5,565.89 down -37.63 The early call for the open of key US indices is lower.

Note: Dean will be away traveling for the next two week’s and will return to publication on April 29th.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza