Following a week session in the euro yesterday on the back of the ECB turning more dovish today we see the market continuing to route the euro currency. Today, in addition to that shifting expectations regarding interest rates for that ECB, we have dissension turning into resignation as ECB member Stark decided to leave the ECB on account of his objection to the ECB bond buying program (according to Reuters, though the official word is personal reasons). He will be the second prominent German to leave the ECB after Axel Weber - who was in line to head the ECB after Trichet - pulled his name out of the running as a result of his opposition to ECB bond buying. What the message Stark's resignation sends is that there is strong division within the ECB on the path forward. However, with a hawk like Stark gone, and Trichet letting go of the Presidency, the move towards getting rid of the recent interest rate hikes at the ECB may gather momentum.

From Bloomberg: ECB Dealt a Blow as Executive Board Member Stark of Germany Steps Down

width=366Juergen Stark resigned from the European Central Bank's Executive Board after protesting the bank's bond purchases on a conference call earlier this week, said a euro-area central bank official familiar with the meeting.

During the Sept. 4 call, Stark, 63, expressed his strong opposition to the program, which was expanded last month when the ECB started buying Italian and Spanish bonds, said the official, who spoke on condition of anonymity because the discussions are confidential. Stark was supported by the central banks of Austria and the Netherlands, the person said. The resignation of Stark, the ECB's chief economist, is a blow to the bank, the official said, noting he is the second German ECB member after Axel Weber to leave over the bond program.

Stark's resignation, less than two months before President Jean-Claude Trichet's term ends, suggests policy makers are increasingly split over the best way to fight Europe's debt crisis. The ECB's bond purchases have also been opposed by Bundesbank President Jens Weidmann and his predecessor Weber, who earlier this year pulled out of the running to succeed Trichet.

On top of that we have concerns that Greece may need to default, especially if it is unable to secure its latest round of funding from the IMF and EU There core troika: the second head back to the country next week to see if Greece has met its deficit targets. If not we could be replaying that concerns we had beginning of April of an imminent short-term default were only exacerbated by the officials in Germany saying they are writing up contingency plans for German banks in the results of a Greece defaults.

From Business Insider: Why Everyone's Thinking That Greece Is Going To Default

Greece bank managers have said they expect private sector participation in the bond swap to reach about 80. This is well short of the 90% Greece demanded last month. If Greece were actually to take a hard line on this, it would compromise an $185 billion piece of the bailout agreement.

This swap technically signals default anyway, so the failure to go through with it means we'd see a hard default rather than the managed, selective default outlined in the July 21 agreement.

Second, Greece could learn that it will not receive further aid funding from the ECB/EU/IMF troika. Superficially, this doesn't seem like a huge deal. The aid funding at stakes is $11 billion, small really in comparison to the size of Greek debt ($644 billion in 2010).

However, failure to receive this funding would signal that Greece is not meeting its debt and privatization goals, and jeopardize support for the bailout agreement announced on July 21. Parliaments and governments across the eurozone are deciding whether to move forward with that this month.

We saw a heavy selloff in European equities and that has turned into a rout of risk assets in our currency markets.

Here's the German DAX30 index over the last 2 weeks:

We see that following an attempt to correct decline that we had to and last week and to begin this week, we end the week with the DAX falling sharply, sliding by 4%, pretty much heading back to lows we had at the beginning of the week.

Adding fuel to the fire, Germany was said to be readying a plan to help their banks in the case of a Greek hard default.

From Bloomberg: Germany Said to Ready Plan to Help Banks if Greece Defaults

Germany's emergency plan if Greece defaults involves measures to help banks and insurers that face a possible 50 percent loss on their Greek bonds if the next tranche of Greece's bailout is withheld, said the people, who spoke on condition of anonymity because the deliberations are being held in private. The successor to the German government's bank-rescue fund introduced in 2008 might be enrolled to help recapitalize the banks, one of the people said.

Questions over Greece's ability to meet the terms of its first rescue package are dogging the indebted nation as bondholders weigh whether to participate in a debt exchange that's crucial to a second bailout. Greece is seeking preliminary responses today from bond investors to the proposed debt swap, part of a 159 billion-euro ($220 billion) European Union rescue plan agreed upon in July.

The Japanese yen seeing a lot of the state haven flows was much stronger against not only the euro but other higher-yielding currencies - like Australian and New Zealand dollars. This tells us that Japanese yen is again one of our dominant safe haven currencies, considering the Swiss franc has to grapple with SNB intervention.


The EUR/USD has solidified its move be below the 200 day of the moving average, slicing through important horizontal support at 1.3840. This puts the pair at its weakest level in more than six months though we did have a slight pullback today extreme lows we reached today session at around 1.3615. the disarray could mean that the euro continues to extend its declines coming out of the weekend and in the worst-case possibility of an actual Greek default over the weekend the euro dollar could return all the way down to 1.30.


The EUR/JPY, which we're looking at in the for our timeframe broke below important support as well heading to lowest it's been in nearly 2 years. Hereto we see a pullback from the depths of the decline at around 105.20 but overall the hereto we see the precipitous decline of the euro and the potential for further downside risk if we come out of the weekend with negative news.

Nick Nasad
Chief Market Analyst