Friday, June 17, 2011

Will Greece Default?

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By Mike Conlon | June 16, 2011

That is the question weighing on the market right now as the in-fighting amongst Euro zone members appears to be dominating discussions. With no resolution in sight, risk aversion is heightened in the marketplace as global markets have sold off and the US dollar has strengthened on the flight to safety trade.

This is clearly the major theme in the markets and all else is taking a backseat until this situation is resolved, for better or worse. Meanwhile, there are riots taking place in Greece, and the Greek PM has changed his government cabinet which may be akin to rearranging the deck chairs on the titanic!

This situation and crisis threatens the global banking system and the consequences of a Greek default are unknown at this time. Whether the Euro can survive remains to be seen, especially if there is contagion to the other indebted nations. What is certain is that markets will be volatile as they hate the uncertainty of the situation.

CPI data came in for the Euro zone slightly lower than expected, though no one at this point can possibly be expecting a rate hike anytime soon at this stage of the game.

In the UK, retail sales figures came in worse than expected, posting monthly declines which sent the YoY figures to near flat.

In Switzerland, the SNB left interest rates unchanged at .25%, as recent franc strength has hurt exports.

So the markets are starting the morning in risk aversion mode, with stocks lower though commodities are slightly higher. Later this morning, the release of data in the US including housing starts, initial jobless claims, and the Philly Fed are unlikely to change sentiment.

In the forex market:

Aussie (AUD): The Aussie is lower as risk aversion has dampened the demand for yield-seeking in favor of the safe-haven play.

Kiwi (NZD): The Kiwi is also lower across the board for the same reasons as the Aussie, even though yesterday’s performance of manufacturing index came in better than expected.

Loonie (CAD): The Loonie is also lower due to risk in the marketplace, and Canada’s close ties to the US may be more of a hindrance to their economy than a help.

Euro (EUR): What more can we say about this Euro situation? Right now it is a game of “wait and see” but the prospects for a resolution look bleak. There are stories being floated that Greece may get the IMF money even if there is no resolution, but that only provides temporary relief and doesn’t fix the problem.  (Click chart to enlarge)


Pound (GBP): The Pound is also lower after UK retail sales figures came in worse than expected, showing declines of 1.4% for the month vs. and expectation of a decline of .6%, pushing the YoY number down to .2% from an expected 1.7%. So the economy is definitely contracting, but will this provide inflation relief?

Swissie (CHF): The franc is stronger across the board on the fight to safety trade despite the fact that the SNB did not change monetary policy which was as expected. (Click chart to enlarge)


Dollar (USD): The Dollar is showing continued strength on risk aversion and the data so far this morning for the US actually did come in better than expected, though not enough to reverse sentiment at this point. Building permits came in higher than expected, and initial jobless claims were lower than expected, but still above 400K.

Yen (JPY): The Yen is also stronger this morning as the demand for carry trades and risk appetite has been put aside in favor of the safe haven play.

It was only a matter of time before it came time to “pay the piper” and it is very alarming that EU leaders let this situation become this bad. Short-term interest rates in Greece had been rising for some time and they should have known that issuing debt at those levels was not feasible.

Essentially world markets have been hijacked and held for ransom by governments unable to do their jobs. Salutary neglect is not a sound policy and meaningful steps need to be taken to resolve the issues. Not just in the Euro zone, but around the globe. Imbalances exist for a variety of reasons and now we are at such extreme levels that something has to give.

With the global economy slowing as a result of decreased confidence, austerity measures, and bad government, it will be very difficult to return to growth. In the meantime, volatility will persist until the hard choices are made and accepted by the people. There has to be a belief and hope that things will get better, even though no one seems to be doing anything to make that happen.

So try to invest in the areas that seem to be doing the best job to return to prosperity, and avoid those looking to kick the can further down the road. The forex market is one excellent way to do just that!

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

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