Risk aversion in currency markets resulting from a split within the EU over financial aid to Greece

[RTFX-Trading]

Risk aversion in currency markets resulting from a split within the EU over financial aid to Greece

The US Dollar and Japanese Yen are up today against higher-yielding currencies, following a split between EU leaders during the weekend over financial aid to Greece. While Germany is urging Athens to solve its debt problems alone, Italy strongly backed EU support. Greek PM George Papandreou has said that his country will be able to deal with their 2010 shortfall of €53B, €20B of which are needed by April and May, only if it is able to borrow on “reasonable” terms, otherwise turning to the IMF for help as a last resort. Reaching an agreement will be virtually impossible without support from Germany, the region’s top economy. Such support became suddenly remote last Thursday after an official inside the Berlin administration said that “in the case that the Greeks get into really serious problems, Germany would support an IMF solution.” Any involvement from the IMF would likely have negative implications for the EU and risk appetite at large, showing that the world’s largest economy is unable to keep its own house in order.

Meanwhile, the Euro slipped against the US Dollar to 1.3463 yesterday, and fell to 121.06 against the Yen. ‘Carry trades’ also fell yesterday, with the Euro, Sterling, Australian, Canadian and New Zealand Dollars all losing considerable ground against the Yen. The Euro is down 0.62%, while the Australian and Canadian Dollars are down 0.66% and 0.75% respectively versus the Yen. The biggest loser is the New Zealand Dollar which lost 0.99% against the Japanese currency.

With an EU summit scheduled for the 25th and 26th anything short of a decisive outcome is likely to spur renewed risk aversion, which in turn would put more pressure on ‘carry trades’ and upward pressure on the Yen as investors unwind their higher-yielding FX exposure.

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Emman Xuereb
Trading Desk
RTFX Ltd
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