By Dean Popplewell
Grexit has not occurred yet, but contagion is surely here, just look at the unsustainable debt financing levels in Spain. The EUR squeeze continues, albeit painfully slow. When the Capital markets eventually go for the Greek “kill,” euro policy makers will not have had the time to put in place a structure that allows Greece to leave in an orderly fashion. The potential exit of Greece from the Euro system over the next few months could have some “catastrophic consequences.” The stresses and strains potentially being put on the periphery will again lead to dollar liquidity concerns topping most lists.
The reality is that EU sovereign issues and concerns for the health of its financial system continue to intensify. Just look at the the Spanish banking system. Many believe that the current intensity feels higher than those present after the collapse of Lehman Brothers nearly four-years ago. Whatever fiscal adjustments need to be implemented for the periphery countries will again require a downward revision of growth projections for Europe. The current pace of growth, albeit small, depends on a fast resolution to the periphery crisis and a notable reduction of “this” financial stress. This is unlikely to happen with Spain being in a full-on credit crunch. Due to the economy’s size, it will “ravage” any of it’s own growth, and in turn has a good chance in spreading to other parts of the continent. Forget Greece, the outlier, Spain is the variable to watch here on in.
On the political front, Greece faces another general election after political parties failed to form a “unity” government yesterday. A caretaker government will be chosen today to oversee this election, expected to be held in the middle of next month. Merkel and new French President Hollande indictate that they would consider measures to spur economic growth in Greece, as long as voters there commit to the austerity demanded for Greece to stay in the euro. However, so far this has had no effect on the one way directional play of the single unit.
Despite Italy posting a +EUR2.1b foreign trade surplus or a real downer of a BoE Quarterly inflation report, that put GBP under pressure on the EUR cross, has not been able to dissuade the EUR from testing European session lows. The rabid exiting of risk positions continues to intensify in emerging economies. This is noted by the increasing number of CBank interventions that are trying to slow their currency depreciation down. Even a surprisingly pleasant UK benefits count and an ease in the ILO jobless rate to +8.2% has been trumped by the greater concern over growth and risks from the Euro area than investors had expected.
The EUR position chart has not changed much in the past 24-hours. The spread between the long and shorts remains close to 10. The market has been long and wrong, but, it seems that the current move has not been squeezing too many bulls out of their positions. Perhaps they are relying on the bears who are beginning to question when is it time to pare some of “their record” reported shorts. The EUR flight does feel like a falling knife, albeit, an orderly one ever since the break of 1.30. The market continues to decline from the weekly top of 1.2935, honing in on this year low of 1.2624, recorded in early January. Daily momentum remains negative, adding to the bearish sentiment. The wall is expected to appear soon, but will it be this year’s low?