After a rudderless G7 meeting over the weekend that saw no resolution on the Greek crisis, risk currencies drifted lower once again at the start of Asian session trade, but rebounded sharply on short covering flows when European markets opened for business. The G7 meeting produced no concrete agreement on the issue of Greece’s fiscal problem. Furthermore congregants proposed a possible 15bp levy on the banking sector to help pay for the massive fiscal deficits incurred by all the members in 2009. The tax should it ever go into effect would no doubt only aggravate the capital markets putting an additional cost on the finance sector. Nevertheless, despite absence of any positive news high beta FX rallied strongly in early morning London trade.
As we noted earlier,” Although the euro remains pressured by the political and fiscal upheaval in the union, the currency is now grossly oversold after declining for 12 out of the last 15 days. The latest data from CFTC shows that euro positioning has turned strongly negative with shorts growing to 43.7K contracts from 39.5K the period prior. The increase in shorts is now at a record in the series and argues for some sort of technical bounce as late comers get squeezed.” The push higher was led by Russians, who are typically very adroit traders of inflection points in the FX market and suggests that for now the EUR/USD may have found a temporary bottom at the 1.3600 level.
With very little economic data on the calendar this week the pair is likely pause for few days after taking a massive drubbing that saw the EUR/USD decline more than 1000 points over the past month. Still we believe any bounce here will simply be a tactical opportunity to sell as the neither the political nor the economic climate in the region appears to show any signs of improvement for the time being. The one silver lining for the EZ economy as a result of the recent euro weakness is the considerable alleviation of cost to the key export sector. However, with demand in China likely to cool off and US consumer still moribund, its difficult to determine if the lower exchange rates will provide any material benefit to EZ producers.
With nothing on the eco calendar for the rest of the day, risk FX is likely to be driven by equity flows. Last Friday’s late session rally in the Dow eased most of the intra-day losses and if index can recapture the 10,000 level today it can provide a further boost to high beta currencies. Having retaken the 1.3700 figure, the market may set its sight on the 1.3755 post NFP high as the next marker to squeeze the late shorts.