WORLD FOREX: Eerie Calm Before Greek Elections; Sterling Stumbles - NASDAQ
-- Norwegian krone, Swedish krona and Japanese yen make last-minute safe-haven surge before Greek election weekend
-- Euro holds steady in nervous trading ahead of Greek elections
-- Sterling briefly dives as BOE launches fresh crisis-fighting liquidity measures
By Alexandra Fletcher
Sterling stole the show in early European trade in an otherwise quiet session ahead of the Greek elections, diving against other major currencies as the Bank of England announced a new liquidity facility to help shield the U.K. from euro-crisis fallout, fanning suspicions the central bank is preparing for a rate cut.
The pound shed some 0.3% against the dollar, trading to a low $1.5477 and the euro surged to the day's high of GBP0.8152 as London traders digested the news that the Bank of England will launch its first auction as part of a series of emergency liquidity measures that will offer six-month loans to U.K. banks in exchange for a wide range of collateral.
The announcement of the initiative has prompted expectations that the Bank of England might extend its asset purchasing program, or quantitative easing, at next month's monetary policy meeting, with Barclays--a prominent U.K. bank--shifting its view so that it now expects a boost to so-called QE at the central bank's July meeting.
Further fuelling sterling sellers, the BOE also signaled deepening gloom over the U.K. economy, and concern over euro- crisis fallout. In addition to the liquidity boost, it also kickstarted a new program to encourage banks' lending to businesses.
"The alarm [over the deepening of the euro-zone crisis] in official circles was evident in the new initiatives on bank support... It remains to be seen how effective these two measures will be, and in the meantime we believe there is a strong argument for augmenting them with more QE," said Simon Hayes, an economist at Barclays in London.
However, alarm bells didn't ring for long and sterling rebounded to levels seen overnight during Asian hours.
Elsewhere, the euro was trading steadily, holding onto some small overnight gains against the dollar ahead of the Greek elections this Sunday, the result of which could determine whether Greece stays in the euro zone or not.
Some investors were seeking out safe havens for their cash in advance of the vote that is seen as a referendum on Greece's membership of the common currency. The hunt for safety sent the Norwegian krone to a three-month high against the euro and the Swedish krona to the day's high. The Japanese yen also benefited from safe-haven flows, charging to a one-week high against the dollar.
Looking ahead, after a bad run of U.S. data Thursday, the U.S. June Empire State manufacturing survey is due at 1230 GMT, along with U.S. May industrial production data at 1315 GMT.
At 1005 GMT, the euro was trading at $1.2619 against the dollar, compared with $1.2633 late Thursday in New York, according to trading system EBS. The dollar was at Y78.68 against the yen, compared with Y79.35, while the euro was at Y99.29, compared with Y100.26. Meanwhile, the pound was trading at $1.5548 against the dollar, compared with $1.5563 late Thursday in New York. The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 81.786 from about 81.810.
-By Alexandra Fletcher, Dow Jones Newswires; +44 (0) 20 7842 9462, alexandra.fletcher@dowjones.com; @djfxtrader
(END) Dow Jones Newswires 06-15-120734ET Copyright (c) 2012 Dow Jones & Company, Inc.
Forex Traders Positioned for the Worst on Greek Elections - Caution - DailyFx
Upcoming Greek elections could force substantial volatility in the Euro and other major currency pairs, and a broad range of market indicators show that conditions show fears for the worst. DailyFX Currency Analyst Christopher Vecchio lays out the stakes and fundamental reasons for why Greek elections could materially change outlook for the Euro. Trader positioning likewise shows fear for the worst—how exactly?
Forex options markets show that 1-week volatility expectations are at their highest since the Euro/US Dollar topped near the $1.45 mark in October, 2011. According to Bloomberg’s options data, traders are pricing in as much as a 200-pip daily range for the Euro every day through next week. The last time the Euro set a 200-point Average True Range (ATR) over 5 days occurred as it set a short-term top at $1.38 (on 11/14/2011) and subsequently fell a substantial 370 pips from its peak in that same week.
Traders should remain extremely cautious and limit positions and especially leverage ahead of the weekend. The inability to close/open positions as election results are announced creates significant risk of outsized losses. When markets open, we likewise expect markets will be extremely volatile and difficult to trade.
Euro 1-Week Implied Volatility Levels At Highest Levels since Critical EURUSD $1.45 Top
Data source: Bloomberg
Chart source: DailyFX.com, R-Project.org
Why do traders fear the worst? Quite simply, a far-left party victory could effectively push the government of Greece into default as party leaders have made it clear they intend to issue a moratorium on debt repayments and renege on bailout agreements.
No regional government has defaulted on its debt in the Euro’s 13-year history, and most expect that a Greek default would force it out of the Euro Zone. The size of the Hellenic Republic’s economy suggests that it should have relatively little impact on the broader region. Yet the most significant risk is that a Greek default forces substantial strains in at-risk in the EMU’s third and fourth-largest economies in Spain and Italy.
We can gauge overall fear of Greek default by the yields investors require for long-dated bonds; high yields show strong expected risk of default. An extremely negative correlation between Greek Government 10-Year Bond Yields and the Euro/US Dollar emphasizes the importance of the weekend’s elections. If Greek 10-Year bonds surge as traders prepare for default, correlations suggest the Euro/US Dollar could fall even further.
Data source: Bloomberg
Chart source: DailyFX.com, R-Project.org
Given such clear risks to the Euro’s very existence, traders are quite clearly positioned for further declines. As of last week, large speculative futures traders were the most net-short Euro/US Dollar in history, while commercial hedgers were likewise at their most defensively net-long on record by a very large margin. Finally, FX Options traders are paying extremely largest premiums for aggressively bearish 1-Year EURUSD Options—underlining fears of substantial Euro weakness and ‘tail risk’.
Euro/US Dollar Futures and Options Traders Positioned for Aggressive Declines
Data Source: Commodity Futures Trading Commission, Bloomberg
Chart Source: DailyFX.com, R-Project.org
The writing on the wall tell us that the Euro could fall substantially on sharply negative disappointments, and trader positioning likewise shows that many are betting on or hedging aggressively against EURUSD weakness. Yet there is absolutely no guarantee that Greek elections will produce such negative outcomes. Volatility expectations themselves predict that price moves could be substantial in either direction.
In fact, such one-sided bearish sentiment and leveraged bets warn that a positive surprise could force a significant Euro recovery. Traders should remain extremely cautious ahead of the weekend, limit leverage, and trade defensively following Sunday’s market open.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
To receive this author’s reports via e-mail, send subject line “Distribution List” to drodriguez@dailyfx.com
Contact this author via Twitter at http://www.Twitter.com/DRodriguezFX/
FOREX-Dollar extends losses vs yen after US data - Reuters UK
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