AFTER GREECE, THE EURO WILL LOOK TO DATA
CURRENCY markets were in a state of suspended animation, awaiting the Greek no confidence vote. But the verdict of the parliament in Athens wasn’t surprising. Prime Minister Papandreou was never likely to lose, despite the fact that he had a majority of just five in the parliament of 300. The stakes were simply too large. If the Papandreou government fell, the ensuing chaos could easily have sent the euro below the $1.4000 figure, as the prospect of a Greek default suddenly became quite real.
Even with the Papandreou government’s survival, and the austerity measures passed by the Greek parliament, the credit crisis will face additional challenges. The German Banking Federation is now demanding better incentives before its members are asked to extend repayments on their existing Greek debt. The situation is complicated further by the rating agencies who may not acquiesce to a rollover of Greek debt. Fitch Ratings warned it would treat a voluntary rollover of Greece’s sovereign bonds in any rescue package as a default and would cut the credit rating accordingly.
Nevertheless, now the Greeks have been able to stave off immediate crisis, the focus in the euro-dollar will turn to economic rather than political news. As the week proceeds, the market will get a glimpse of the flash PMI data on Thursday and the IFO survey on Friday. Given the disappointing results from Tuesday’s ZEW report, which showed the first negative reading since October 2010, I believe there is a strong chance that the latest economic data from the Eurozone could miss to the downside. Despite the turmoil in the periphery, euro-dollar has held up remarkably well over the past month on the assumption that growth in the core economies will lead to further tightening by the European Central Bank, but that thesis will be sorely tested if this week’s reports show a significant deceleration in economic activity. That’s why even if euro-dollar rallies in post-vote euphoria, its gains may be capped at the $1.4500 level.