Euro Falters as Potential Greek Default Worries Market

Includes: ERO, FXS, UDN
by: Ralph Shell

European bankers and finance ministers thought they had reached a workout whereby the Greeks would get their bailout, and private banks would graciously roll forward a portion of the expiring Greek sovereign debt. Despite protests from the Greek populace, the austerity measures would commence, and a portion of the government held assets would be put up for sale.

The celebration of the single currency backers was brief, interrupted by an opinion from Standard and Poor that the French bailout plan, as structured, would constitute default. With the possibility the current bailout plan needs some modifications, the euro has sold off from Friday's high of 1.4570, and is currently trading at 1.4469.

Despite the uncertainty about the Greek bailout, there may be further support in the EURUSD this week. On Thursday July 7th, ECB President Trichet is expected to use a .25 point increase in the central bank rate to fight inflation. Although there is some evidence the economic expansion in Europe is slowing, it is still forecast the rate increase will occur. Should the rate remain unchanged, this would be a shock to the many euro longs.

Following the Thursday announcement from the ECB, the market then contends with the US NFP report and the unemployment rate. It is expected that the report will show an increase of 87K jobs, up from 54K in the previous period. Should the number confirm the expectations, this is a far smaller number than needed to reduce unemployment, and will probably be interpreted as bearish the USD.

A potential negative for the NFP number is caused by the reduction of the Federal government's stimulus money. Much of this money was dispersed to the states to 'stimulate' as they saw fit. States, confronted with tumbling revenues, chose to spend the money to meet their existing payroll. With the Federal money gone, pink slips in the public sector are being issued, increasing the number of unemployed.

Should the euro weaken back to the 1.4350 area, we are inclined to try the long side, looking for a retest above 1.45. Remember, in the US there is uncertainty about the debt ceiling, and will this be resolved in time to avert default. There are some rumors about a short-term settlement, but there is still several weeks for political posturing, which may prove unsettling to the USD.

An alternative to either the euro or the USD is the Swedish Krona. Like many parts of the developed world, the economy in Sweden, too, is slowing. The Swiss National Institute of Economic Research estimates their GDP growth at 4.4% for the balance of the year, down from 6.4%. Concerned with inflation, the Swedish Riksbank today raised the bank rate .25 points to 2.00%.

The USDSEK pair is trading like the rate increase was already in the market. The USD has sold off from 6.54 to 6.24, but has since recovered to 6.29. Consider selling the USD and a rally back to 6.35, with an objective of 6.00. As always watch your stops.

(Click charts to enlarge)

Euro Falters as Potential Greek Default Worries Market Euro Falters as Potential Greek Default Worries Market

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.