EUR: Not Necessarily A Straightforward Buy

By Nic Lenoir Of ICAP

The news out of Europe had a lot of overnight commentaries pointing towards increased risk appetite, but the fervor has already dissipated it seems. Most people had been expecting guaranties to be the form adopted for the bailout. Guaranties present the advantage of not requiring any disbursement of money up front and are the easiest way to provide assistance. In the case of Greece where market access could have been a problem the fact the weekend's resolution came in the form of loans provides a bit more certitude. However beyond this technical convenience there are major hurdles associated.

First of all this is another roller coaster ride because all of the details are not fully agreed upon and there definitely seems to be room for another fiasco. Then there has already been a flurry of very aggressive comments against the decision and Merkel's role in the negotiations which means that even if everything goes through as presented over the weekend there will be a lot of bitterness associated with an issue which will not just go away if we kick it 3 years down the road. Then there is the fact that the loans would allegedly be below market rate. It pretty much tells us that at current market rates Greece would have no shot at paying the bills. So raising rates is completely out of the question for ages, and every country under pressure will have to resort to the same gimmicks. And at the end of the day it means the debt stays on the "Euro" balance sheet so it is just a matter of spreading the burden to other within the eurozone. In the end the only development that would be a true "positive" for the Euro from a currency standpoint for the long term is to move Greece out of the union, or maybe a default. However if both would be positives in terms of fiscal behavior and send a strong message about dedication to deficit management, it would also be a clear admission that the set-up of the currency was flawed from inception (if it's not obvious by now) and that there is a lot of divide inside the "union" (also quite obvious).

From a technical level we have bypassed the 50-dma which has been strong support/resistance envelope. However a break like this is only validated on a daily close. We also see that we have actually rejected the 76.4% retracement of the sell-off of March 17 to March 25 at 1.3690 this morning. As a result we would be a bit cautious here before calling a major turn. Only a close above the 50-dma will confirm more upside is in the cards for the short term. As far as the big picture is concerned, we remain bearish for the long term without a doubt.

Good luck trading,

Nic

Comments

[Arkons]

Kill it with fire.

[mikla]

...And ironically, we'll use Greek Fire.

Greek fire (a chemical incendiary device) was used by the Byzantines, and was very effective -- it actually burned hotter when you throw water on it.  Of course, in today's metaphor, the Greek Fire is Greece, and debt is water -- the more water you throw on Greece, the hotter the conflagration.

Similarly, we all know not to throw water on grease fires in the kitchen -- it merely spreads the fire.

The astounding stupidity of giving Greece more cash, so they can burn through more cash, so they are even more unable to pay back their debts ... is insane at colossal levels.

[Buck Johnson]

I totally agree with you, they should just let Greece default and allow them to walk away from the EU.  The funny thing about this whole bailout issue is that the details to the money are murky.  It would be easier to backstop their banks that are on the hook for billions in Greece and then say adios to the country.