Greek aid plan allows Euro to pare weekly loss

The EUR USD erased some of its weekly loss as weak shorts pared their positions in the wake of positive developments out of the European Union summit.

The EUR USD erased some of its weekly loss as weak shorts pared their positions in the wake of positive developments out of the European Union summit. Early Friday it was announced that France and German threw their support behind a modified agreement to allow the International Monetary Fund to provide bailout money to Greece if needed.

This news underpinned the market from the start of the New York session. Friday’s rally approached the old bottom at 1.3440 but failed to overcome this level. Regaining this price could trigger an acceleration to the upside if traders who shorted on the break through this bottom decide to aggressively cover their losing positions.

Although this event triggered a short-covering rally in the Euro, traders approached the news with caution. The initial reaction to the upside means that tensions have eased and fears calmed now that it appears Greece’s sovereign debt problems will not spread to other Euro Zone nations after all. Most traders now believe that this deal is enough to stop the slide in the Euro, but not enough to turn the bearish trend around.

Earlier in the week, such a bailout deal looked pretty remote. The Euro was falling, driven lower by comments from European Central Bank President Trichet who said that a bailout from the International Monetary Fund would be bad for the Euro. His feeling was that help from the IMF would make the EU look weak and unable to take care of its own financial problems. Throughout the week, traders felt that a deal was far from being made.

Traders became more optimistic about the prospects of a deal late in the week when a plan endorsed by France and Germany was agreed upon. The new deal calls for a mix of IMF and bilateral loans. Afterwards, Trichet embraced the proposal saying he was “extraordinarily happy that governments of the Euro area found out a workable solution.” His statement amounted to an about face from a statement earlier in the week when he said that an IMF role in the funding of a rescue plan for Greece would be “very, very bad”.

Trichet’s acceptance of the plan was mostly responsible for Friday’s short-covering rally. His acceptance of the proposal helped ease concerns that Euro Zone officials would be unable to resolve the fiscal problems in Greece.

Whether a turnaround in the Euro marks a major bottom is really up to the hedge funds at this time. Recent data suggests that hedge funds and large speculators remain net short the Euro in a big way. Until these large traders are forced to cover shorts or turn into buyers, expectations for the current rally will be limited. The whole process of debating about financial aid for Greece has shaken investor confidence in the entire Euro Region.

The GBP USD traded better to end the week in a knee-jerk reaction to the rise in the Euro. The inability to break to a new low for the week helped to contribute to the rally. Like the Euro, this action is only indicative of short-covering and not a potential change in trend. Neither a closing price reversal bottom nor a main trend top breakout is taking place, meaning that the trend is still decisively lower. Negative fundamentals such as political uncertainty, the threat of a credit rating cut and a “bumpy” recovery are helping to limit gains.

The USD JPY finished lower after attempting to take out Thursday’s high at 92.95 and failing. The turnaround in the U.S. equity markets from up to down also contributed to the weakness. Overbought conditions could drive this market back down between 91.62 – 90.85 if the stock market continues to weaken.

Mixed demand for higher yielding assets helped to boost the USD CAD. Higher gold and weaker crude oil was a sign of uncertainty. This news triggered a continuation of the short-covering rally which began a week ago. The daily chart indicates that there is room to the upside with 1.0369 to 1.0442 the next upside target.

The stronger Euro helped to pressure the USD CHF. Following a rally inside a retracement zone at 1.0703 to 1.0749, this pair found sellers who are now trying to work this market lower into another retracement zone at 1.0628 to 1.0600. The stronger the Euro gets, the less likely the Swiss National Bank will intervene.

Weakening U.S. equity markets and overbought conditions helped to push the AUD USD lower. Based on the main range of .8577 to .9251, traders should watch for a correction back to the retracement zone at .8914 to .8834.

The NZD USD closed lower after an earlier attempt to rally failed. This market traded inside of yesterday’s range indicating impending volatility. The daily chart indicates that a break to .6992 to .6948 is likely over the near-term. Friday’s rally in the Euro appears to be bullish only for the European currencies rather than the Asian and Pacific Rim markets.