By Dean Popplewell
Markets fear the unknown and with Greece we seem to be on the periphery of a black hole. Contagion fears are back in full force, not that they ever left. With Greece edging toward that EUR exit, pressure is beginning to build in all the right or wrong places. The Yield on Portuguese sovereign debt is climbing faster than that of its Greek counterpart. Spanish and Italian borrowing costs are backing up. Global markets are pointing to another imminent euro crisis, again, with Greece at the epicenter.
The anti-austerity rhetoric from that country appears to have intensified in the O/N session. This can only increase the possibility of another general election taking place next month, while the prospects of Greece ever exiting the EU just got that bit more likely. Why? There is a considerable risk that a left-leaning coalition would be formed at the next general election with a more explicit mandate to reject the EU and IMF program. Obviously under this scenario, Greece’s continued membership would be put in question.
Market fear is not the political rhetoric, nor the rise of the left's anti-austerity feelings, it’s the fear of what would unfold if Greece were to physically leave and lapse its euro membership. Despite believing that a Greek exit would be probably less damaging than say it occurring a year ago, mostly due to the EU firewall building campaign, the question is not about Greece itself. It’s about whether a Greek exit “exacerbates pressure on other countries to do the same.” If so, the stability of the eurozone banking sector will be called further into question. How strong is that firewall? It’s now that we are getting a sense of urgency. Only last night, the Spanish government announced plans to require its banks to set aside between +EUR20b and +EUR40b in additional provisions as part as an effort to overhaul the country’s financial woes.
Currently, spot exchange seems to have no bounce, no lift, no life. Greek woes are keeping the EUR offered outright. Even the EUR crosses are lending a hand. Technically, there are offers into the 1.30 expiry that are slowing any drift higher and keeping the stop-losses in that handle intact for now. The rumors of Middle-east offers are helping to cap any upward general movement. On the downside, support reappears at 1.2960-50, where barrier expires are due to run off today. With this out of the way, any break of the 1.2950 level could accelerate selling allowing the single unit to further drift into the low 1.29s.
There seems to be a change in trader sentiment and attitude toward the EUR to when we last visited this region maybe five months ago. Many more are talking about barriers and options supporting the currency, that includes corporate demand and repatriation flows. This time around there seems to be an equal amount of bottom “feeders” and top “pickers.” Looking at the position diagram below, the percentage of shorts have reduced day over day.
Yesterday, close to these levels, the market was 54% short the single currency. Today, that total is 48.5%. Why? Some individuals simply believe that this currency is better supported than before. In this scenario, there is no real saturation of shorts to limit the EUR’s downside. One can expect the bottom pickers stops to be eventually triggered, adding fuel to the EUR’s existence debate.