Euro Hits Fresh Lows As Germany Balks at Bailout

The EUR/USD hit fresh yearly lows in a massive liquidation run as concerns over Germany’s refusal to aid Greece pushed the pair to 1.3355 in volatile mid-morning trade. Not even the much better than expected PMI data or the blow out IFO numbers could stem the tide of sell orders as FX markets remain on edge regarding a potential currency crisis in the world’s largest economic bloc.

The selloff was precipitated by fears that an IMF involvement in the Greek (Germany's preferred solution) budget crisis may not be enough to help Greece reduce its financing costs which are double that of Germany’s. Without a pan-European loan guarantee Greece may not be able to lower it cost of borrowing which is the primary concern of Greek fiscal authorities. Markets will keep a watchful eye on the EU summit tomorrow for any clarity on the issue.

Yet despite the fact the sentiment towards the EUR/USD remains extremely negative, the eco data from the region has shown surprising strength. Today’s IFOP reading which printed at 98.1 vs. 95.8 and the EZ PMI report which came in at 56.3 vs. 54.5 indicate that a lower euro is having a positive impact on export centric region. Given the latest data, growth in Q1 could exceed expectations and if the Greek budget crisis situation could find some sort of a resolution tomorrow, the EUR/USD could stage a short covering rally, as political risks will recede while the economic data proves supportive.

Meanwhile USD/JPY spiked above 91.00 in early European trade as stop running above the 90.80 region sparked fresh inflows from model accounts. The pair remains trapped in 89.00-91.00 zone as traders watch the short term rates differentials. We noted awhile back that if the 3 month LIBOR spreads between US and Japan begin to widen out USD/JPY could climb to 95.00 and beyond. For now the breakout appears contained, although the path of least resistance is higher.

In North American today attention turns to US Durables and New Home Sales with markets expecting a rise in both which could propel USD/JPY even higher. The true focus however will remain on the development in the EZ with markets monitoring every piece of rhetoric ahead of the summit. If EU officials can provide some assurance that the Greek situation may be resolved, the pair could reverse much of the overnight move as bargain hunters swoop in. However, the situation remains highly volatile and EUR/USD could tumble through the 1.3300 level if the stalemate with Germany persists.