After All is Said and Done, Euro Ekes Out Modest Gain
After last weekâ€™s talk of the need for and the subsequent
announcement last week-end of a rescue plan for Greece, the Euro failed to hold
on to its early gains and succumbed to speculation that the aid wasnâ€™t enough
only to finish slightly better for the week.
On Monday, the EUR USD settled into a range after gapping
open and pulling back from its high throughout the New
York session, as traders awaited more details about the Greece bailout
package. In addition, traders were waiting for Tuesdayâ€™s Greek Treasury bill
auction to see the size of the interest in the countryâ€™s debt. Investors wanted
to see whether there was strong demand for short-term Greek debt or if it was
going to have to borrow to keep up with its financial obligations.
The commodity and equity markets gave mixed signals on
Monday, Initially, both asset classes rallied as the Euro broke out to the
upside. Some traders felt that this new agreement eliminated concerns about Greeceâ€™s
ability to meet its short-term obligations. Some even felt that the funding was
enough to ensure that Greece
would have enough liquidity to implement its new austere financial measures.
Tuesday, brought a different kind of trade to the market
however. Throughout the session, the Euro wavered from up a few pips to down a
few pips as very limited news changed hands. This trading action took place
shortly after Greece
concluded a successful 6-month and 52 week T-Bill auction. Demand was strong
and the bid-to-cover impressive. Interest rates were high, but better than they
were last week. Traders were now waiting for the next move by Greece. It was
either going to be satisfied with the proceeds of the auction or have to use
some of the funds available from the European Union bailout package. Investors
remained cautious about going long the Euro. There was also strong evidence
that hedge funds were continuing to sell rallies.
The U.S. Dollar extended its earlier losses against the Euro
on Wednesday, driven by the dovish testimony of Fed Chairman Bernanke. In
addition to commenting on the direction of interest rates, Bernanke also
emphasized that the economic recovery was still sluggish because of the
floundering labor market.
Testifying before the Joint Economic Committee, Bernanke
reiterated the Fedâ€™s stance that interest rates would remain low for an
â€śextended periodâ€ť.He also said â€śthe
income data suggest that growth in private final demand will be sufficient to
promote a moderate economic recovery in coming quarterâ€ť. Finally, he added that
â€śsignificant restraints on the pace of the recovery remain including weakness
in both residential and nonresidential construction and the poor fiscal
condition of many state and local governments.â€ť
All of this added up to the perception of a weaker Dollar.
Investors who were banking on a more hawkish comment aggressively pared their
Prior to the Bernanke testimony, the U.S. Dollar
strengthened a little following a better than expected Retail Sales Report.
This report was another sign that the consumer was helping the economy to
recover, but the strength it generated was short-lived due to the Bernanke
Bernankeâ€™s testimony put the dismal Greek financial
situation on the back-burner for at least a day. The EUR USD rose due to
expectations of lower U.S.
interest rates for a prolonged period.
economic reports on Thursday helped weaken the Dollar after Weekly Initial Job
Claims and Industrial Production were less than stellar. The job claims report
showed more Americans filed for unemployment aid while factory production came
in below expectations. Both reports signaled interest rates would remain low.
The night before China reported that its Gross
Domestic Product grew 11.9 percent from a year ago. This was slightly better
than the median guesses of 11.7 percent.The news, that Chinaâ€™s
economy accelerated more than expected in the first quarter, raised concerns
that it may be overheating, prompting more talk of a possible interest rate
like. Traders were also increasing speculation that China would revalue its currency as
soon as next week.
On Thursday, after a sharp overnight sell-off it became
clear that market participants were feeling jittery again about the Euro
because of concerns over Greece.
Investors became increasingly worried that the IMF/EU $61 billion financial aid
plan would not be enough to help the Greek economy and restore confidence in
the Euro. As the day unfolded it became apparent that the Euro was facing
serious credibility issues.
High premiums demanded by investors on Greek bonds rose 400
basis points above the German Bund for the first time since the rescue plan was
announced on April 11th. This was the clearest sign that investors were
becoming worried again. In addition, after three tries, the Euro was unable to
take out the high reached Sunday night at 1.3691. Hedge funds continued to be
short and appeared to be adding to their positions on each rally.
By Thursdayâ€™s close, the course of the Euro remained weak. Next
week, several European Union nations will be meeting to approve their
contributions to the EU bailout plan. This voting process could be another
source of turmoil for the Euro. Not only will these nations have to put up the
money to back Greece, but
they may have to begin discussions about the possibility of similar problems
spreading to Portugal.
Now that traders have had almost a week to digest the EU
rescue package, a consensus is building which believes that this plan was
nothing more than a short-term fix and that long-term problems still exist.
Some sources say the key to a long-term solution to the sovereign debt problems
in the EU sits firmly on Germany.
Pressure is mounting on Germany to loosen up a bit and make it easier for
struggling nations to get the aid they need to survive while simultaneously
developing a plan to address financial aid issues which may arise in the
Finally on Friday, a combination of a weaker Euro and
a sharp break in U.S.
equity markets drove the currency back down through last weekâ€™s close to fill
the gap left open on Sunday. At the end of the day and week, the Euro finished
slightly better than last Friday. In conclusion, we learned this week what the
definition of sell rallies means as the Euro was never able to regain the
strength exhibited following Sundayâ€™s surge to the upside. We also learned that
the sellers are still in control and that it is going to take more than $61
billion to solve this financial crisis.
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