After an initial move higher in EURUSD post the agreement between the IMF and the EU on the Greek debt deal, the euro started to sell off. By mid-morning London time the cross was below 1.2950 after rejecting the key 1.30 resistance level. The FX market is prone to buy the rumour and sell the fact, so a sell off after an EU finance ministers' meeting is not unusual. Added to that, there had been three rounds of meetings over as many weeks and a "positive" outcome was widely expected. Since the market expected a positive outcome most of the good news had already been priced in over recent weeks.
The Greek debt deal dissected:
The deal for Greece comes in two parts: 1, Greece gets its next tranche of bailout funds, which means that it avoids default in mid-December when its next major bond redemption payment is due. 2, the EU and IMF agreed to measures to try and bring Greece's debt-to-GDP ratio down to 120% by 2020. This means 1, interest rates paid by Greece on its first bailout loan will be reduced, 2, the profits made by the ECB on its Greek bond holdings will be passed back to Greece and 3, Greece will be given funds in the future to buy back some of its debt at a reduced rate (the loans will probably come from the EFSF/ESM bailout fund).
As usual when it comes to meetings with EU officials they tend to under-deliver. They didn't actually reduce Greece's debt burden and no official holders of Greek debt like the ECB or European governments have had to take haircuts on their debt holdings (unlike the private sector who accepted haircuts earlier this year). Thus, Greece's debt reduction is still reliant on its economic performance, which remains dismal and is likely to continue to be enveloped in recession for many more years.
Looking for fundamental drivers for the euro
A reduction in Greece's overall debt position may have boosted risky assets and caused the euro to rally, as it is the only sustainable solution to Greece's problem. However this half-hearted attempt to sort out Athens' problems is unlikely to sustain a move above 1.30 on its own. The next step is to look for other euro positive fundamental drivers. Spain managed to sell debt easily today and 6-month yields were lower. The outcome of the Spanish election, where separatists who want to push for independence for the Catalan region, won two -thirds of the seats is unlikely to be euro positive. While the result does not have an immediate impact on financial markets it highlights damaging political differences which could start to be a problem if Spain gets into financial difficulties as we expect it to next year. Spanish yields have declined today and remain fairly stable at 5.6%. Overall, Spain is more of a problem waiting to happen rather an immediate concern and is unlikely to benefit the euro in the short to medium term.
Could the focus shift across the Atlantic?
The fiscal cliff in the US remains an unresolved problem. Now that Greek problems are out of the way and Spain is fully funded for 2012, the focus could shift across the Atlantic to the US. Although there have been some positive signals from Congress we need to get an actual deal. Any sign of clashes between Republicans and Democrats could cause risky assets to waver in the medium-term.
Commodity bloc show the market who is boss
The biggest market movers today have been commodity bloc currencies, which are performing well on a broad-based basis. The daily close above 1.0480 in AUDUSD opens the way for a move back to 1.0600 - the highs from September. These tend to be the risky end of FX, so if they are moving higher then in the short term we may see the euro meander back to 1.30 and form a base at 1.2935. The weakest performers have been the SEK and NOK. The SEK was let down by some weak economic data including consumer confidence and was sold off across the board. Both USDSEK and EURSEK have bounced higher today and the next key resistance level to watch in EURSEK is 8.68 - the 200-day sma and top of the recent range.
US durable goods orders could give a nasty surprise
Later today watch for US durable goods orders from the US due at 1330 GMT/ 0830ET. The market expects a 0.7% decline in orders for October, however the risks are to the downside especially as some businesses may have delayed investment spending on big ticket items until after tax changes and fiscal cliff negotiations have been confirmed. A weaker number than expected could weigh on risky assets as it would give us a glimpse into the potential economic impact of the US going over the cliff edge. It could weigh on risky assets and cause USDJPY to decline below 81.80 - the recent low. Support lies at 81.50 - the Tenkan line on the daily cloud.
Ones to watch: AUDUSD and EURSEK
AUDUSD - daily chart - a break above 1.0480 opens the way to 1.06, the top of the recent range.
EURSEK - daily chart - this cross have had a sharp move higher, the next key resistance level is 8.68 - the 200-day sma.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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