It's becoming apparent that any confidence in an agreement on aid to Greece by the close of the EU summit in Brussels is eroding quickly. The EUR and GBP, the two primary recipients of FX risk reduction, have come under renewed selling pressure (while safe haven trades, USD, JPY and CHF have outperformed). At the time of writing, the EURUSD was testing the 1.3500 psychological support, while the GBPUSD traded down to 1.5061. As we have stated on numerous occasions (including in yesterday's newsletter), we believe the EU will not bailout Greece and see EURUSD rallies as an opportunity to short. German and German Chancellor Merkel continued play hard ball, as public opinion has noticeably shifted against providing support to Greece (unless the nation faces looming insolvency). For the Germans, the debate is now being frame as a question of the Eurozone itself rather than just a Greek question and unless the whole EU is destabilized, options other than a direct member bailout remain. EU Commission President Barroso has been doing his best to secure an agreement on a potential mechanism for helping Greece. However, without the support of Germany any scheme would be hollow. Yesterday, the stark testimony by Eurogroup Chairman Juncker to the European Parliament Committee tempered markets expectations. Two key take away were 1. not all member nations were in favor of EU aid to Greece , 2. there was little prospect of anything happening by Friday. As the news hit the wires, the market reacted as expected, selling EUR and Greek CDS widened. Interestingly, we did not see a stark CDS reaction in other members of the PIGS, as the risk of contagion has tapered off. The market positioning seems to be skewed towards a significant downside move in EUR, barring any 11th hour German heroics. The focus of the European session will be the UK CPI. With inflation already above acceptable levels at 3.5%, further price pressure (although most economists are looking for a reduction) will make the BoE job very difficult. Last week, MPC minutes had a noticeable shift on inflation outlook, expressing growing worries at the rapid climb of consumer prices. And upside print should cause a stark reaction in sterling, potentially squeezing oversold positions. And on a final note, China's Premier Wen said that China's trade balance will print as a deficit of USD8bn in March for the first time since May 2004. A deficit would lessen the argument that the China's FX policy is geared towards creating a trade surplus and help lower tensions with the US and internationally.
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