After All is Said and Done, Euro Ekes Out Modest Gain

After last week’s talk of the need for and the subsequentannouncement last week-end of a rescue plan for Greece, the Euro failed to holdon to its early gains and succumbed to speculation that the aid wasn’t enoughonly to finish slightly better for the week.

After last week’s talk of the need for and the subsequentannouncement last week-end of a rescue plan for Greece, the Euro failed to holdon to its early gains and succumbed to speculation that the aid wasn’t enoughonly to finish slightly better for the week.

On Monday, the EUR USD settled into a range after gappingopen and pulling back from its high throughout the New York session, as traders awaited more details about the Greece bailoutpackage. In addition, traders were waiting for Tuesday’s Greek Treasury billauction to see the size of the interest in the country’s debt. Investors wantedto see whether there was strong demand for short-term Greek debt or if it wasgoing to have to borrow to keep up with its financial obligations.

The commodity and equity markets gave mixed signals onMonday, Initially, both asset classes rallied as the Euro broke out to theupside. Some traders felt that this new agreement eliminated concerns about Greece’sability to meet its short-term obligations. Some even felt that the funding wasenough to ensure that Greecewould have enough liquidity to implement its new austere financial measures.

Tuesday, brought a different kind of trade to the markethowever. Throughout the session, the Euro wavered from up a few pips to down afew pips as very limited news changed hands. This trading action took placeshortly after Greececoncluded a successful 6-month and 52 week T-Bill auction. Demand was strongand the bid-to-cover impressive. Interest rates were high, but better than theywere last week. Traders were now waiting for the next move by Greece. It waseither going to be satisfied with the proceeds of the auction or have to usesome of the funds available from the European Union bailout package. Investorsremained cautious about going long the Euro. There was also strong evidencethat hedge funds were continuing to sell rallies.

The U.S. Dollar extended its earlier losses against the Euroon Wednesday, driven by the dovish testimony of Fed Chairman Bernanke. Inaddition to commenting on the direction of interest rates, Bernanke alsoemphasized that the economic recovery was still sluggish because of thefloundering labor market.

Testifying before the Joint Economic Committee, Bernankereiterated the Fed’s stance that interest rates would remain low for an“extended period”.  He also said “theincome data suggest that growth in private final demand will be sufficient topromote a moderate economic recovery in coming quarter”. Finally, he added that“significant restraints on the pace of the recovery remain including weaknessin both residential and nonresidential construction and the poor fiscalcondition of many state and local governments.”

All of this added up to the perception of a weaker Dollar.Investors who were banking on a more hawkish comment aggressively pared theirpositions.

Prior to the Bernanke testimony, the U.S. Dollarstrengthened a little following a better than expected Retail Sales Report.This report was another sign that the consumer was helping the economy torecover, but the strength it generated was short-lived due to the Bernankecomments.

Bernanke’s testimony put the dismal Greek financialsituation on the back-burner for at least a day. The EUR USD rose due toexpectations of lower U.S.interest rates for a prolonged period. 

U.S.economic reports on Thursday helped weaken the Dollar after Weekly Initial JobClaims and Industrial Production were less than stellar. The job claims reportshowed more Americans filed for unemployment aid while factory production camein below expectations. Both reports signaled interest rates would remain low.

The night before China reported that its GrossDomestic Product grew 11.9 percent from a year ago. This was slightly betterthan the median guesses of 11.7 percent. The news, that China’seconomy accelerated more than expected in the first quarter, raised concernsthat it may be overheating, prompting more talk of a possible interest ratelike. Traders were also increasing speculation that China would revalue its currency assoon as next week.

On Thursday, after a sharp overnight sell-off it becameclear that market participants were feeling jittery again about the Eurobecause of concerns over Greece.Investors became increasingly worried that the IMF/EU $61 billion financial aidplan would not be enough to help the Greek economy and restore confidence inthe Euro. As the day unfolded it became apparent that the Euro was facingserious credibility issues.

High premiums demanded by investors on Greek bonds rose 400basis points above the German Bund for the first time since the rescue plan wasannounced on April 11th. This was the clearest sign that investors werebecoming worried again. In addition, after three tries, the Euro was unable totake out the high reached Sunday night at 1.3691. Hedge funds continued to beshort and appeared to be adding to their positions on each rally.

By Thursday’s close, the course of the Euro remained weak. Nextweek, several European Union nations will be meeting to approve theircontributions to the EU bailout plan. This voting process could be anothersource of turmoil for the Euro. Not only will these nations have to put up themoney to back Greece, butthey may have to begin discussions about the possibility of similar problemsspreading to Portugal.

Now that traders have had almost a week to digest the EUrescue package, a consensus is building which believes that this plan wasnothing 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 problemsin the EU sits firmly on Germany.Pressure is mounting on Germany to loosen up a bit and make it easier forstruggling nations to get the aid they need to survive while simultaneouslydeveloping a plan to address financial aid issues which may arise in thefuture.

Finally on Friday, a combination of a weaker Euro and asharp break in U.S.equity markets drove the currency back down through last week’s close to fillthe gap left open on Sunday. At the end of the day and week, the Euro finishedslightly better than last Friday. In conclusion, we learned this week what thedefinition of sell rallies means as the Euro was never able to regain thestrength exhibited following Sunday’s surge to the upside. We also learned thatthe sellers are still in control and that it is going to take more than $61billion to solve this financial crisis.