Another EUR Hail Mary Pass

How many Hail Mary passes can one catch? Greece is running out of ideas and options whilst the rest of Europe is on the verge of letting the ship sail. Not the end of the EU, but one less member. China overnight has pledged her support for the beleaguered union while Greek leaders said they would provide written austerity promises in exchange for a EU bailout. This has allowed risky assets to rally. The EUR temporarily has shrugged off further set backs in Greek negotiations, advancing from its European session lows to again test yesterdays opening prices.

In reality, it will not be the public debates or Greece’s pledge to honor the Troika demands that will persevere, but rather the question of commitment by the country’s citizens to swallow the demands made of them. One cannot get blood out of a stone, the Irish who are being held up as a shining example of austerity commitment are beginning to realize this on the ground level, something the Irish Government is trying to ignore. There will be a ‘real’ time soon when the populous will not be able to comply with the EU and IMF austerity measures, already the show of public discontent is indicating that the Greek citizens have had enough of external bulling.

China’s pledge to invest in Europe’s bailout funds and sustain its holdings of euro assets offers an incentive to European finance ministers, who have been increasing pressure on Greek policy makers to deliver budget cuts in exchange for a second bailout. The PBoC governor Zhou said that the share of EUR in China’s reserves has not fallen and that China wants the single currency to play a larger role as a reserve currency. No investor is willing to buy a ‘lemon,’ apparently Chinese policy makers are waiting for the appropriate time to invest and that time is when European officials can produce innovative instruments with better return profiles. So the onus is again back on European, rather than Greece to save the union. If or when China does decide to invest, they can do this through the EFSF or IMF with funding from the PBoC, China’s sovereign wealth fund, or its development banks. A savvy investor would rather buy when its pennies in the pound!

Today’s Euro finances ministers meeting has been downgraded to a teleconference call due to Greece’s delays in meeting Euro-zone area conditions for a new support program. Apparently, this was due to the Euro ‘boys’ requiring another €325m more in budget cuts and signed letters of commitment to the austerity program from the Greek leaders. Everyone seems to be rather vague on the depth of commitment, however signed commitment is expected to be presented. It is also rumored that PSI restructuring could begin by the end of this week and be completed by the end of the month. Alas, a rumor, however, the best market moves rely on rumors!

Again there has been more doom and gloom this morning on the economic front from mainland Europe. The Euro-zone economy has contracted in Q4 (-0.3%, q/q) for the first time in two-and-a-half years, as nine member states posted a fall, while five entered a recession. This would suggest that the impact of the debt crisis continues to bite and it’s probably prudent to suggest the remaining regions, apart from Germany will follow in Q1. Germany remains the most likely outlier, but not an economy large enough to shoulder the rest of Europe. EUR bears continue to find better levels to short the region again.

Forex heatmap

Other Links:
No End to the Euro Greek Tragedy

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell