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Greek coalition collapse crisis

16 May 2012  •  Source: Richard Driver, CaxtonFX

Greek coalition talks finally collapsed on Tuesday to confirm that another round of general elections will be held, most likely in mid-June and most likely to the benefit of anti-austerity parties. Despite some better than expect eurozone GDP data yesterday, the euro has suffered yet another sell-off with speculation of a Greek euro-exit now rife.

Today’s session brings the monthly instalment of UK unemployment data and the Bank of England’s Quarterly Inflation Report.

STERLING/EURO: The prospect of further Greek elections helps sterling edge higher against the euro.

• The euro initially saw a bit of relief as data revealed that, unlike the UK, the eurozone avoided technical recession by posting a surprising 0.0% Q1 GDP figure. However, forward-looking sentiment surveys, which have held up remarkably well in recent months, finally took a downturn and indicated another dip into negative territory. The news of collapsed Greek coalition talks hit the markets, and particularly the euro, hard yesterday afternoon.

• Today’s UK unemployment data is likely to reveal a further deterioration in the labour market, while the BoE’s Inflation Report is likely to revise up inflation projections (which is sterling-positive), while possibly downgrading the UK’s growth prospects. This pair trades above €1.2550.

STERLING/US DOLLAR: This pair finally gave way as the market fled to the safety of the US dollar in response to Greek headlines.

• US retail sales data was pretty poor yesterday, though there was some improved US manufacturing data. This evening’s release of the US Federal Reserve minutes will be watched closely but we are likely to see more evidence that the central bank is happy to wait and see how the US economy progresses before thinking about QE3.

• US dollar safe-haven demand has been the key to this pair’s latest downward move and sterling is likely to remain under the cosh against the greenback today. This pair trades at $1.5950.

EURO/US DOLLAR: This pair declined by a cent and a half as a result of Greece’s failure to form a government.

• With the chances of Greece exiting the euro greatly increased, major doubts are now hanging over major peripheral nations like Spain and Italy. Bond yields in these two nations rose again yesterday and equities predictably suffered another downturn.

• This pair looks to be heading back to January’s lows of $1.2640, which is entirely down to Greek developments. Further euro losses are looking likely.

STERLING/AUSTRALIAN DOLLAR: Last night brought some positive Australian consumer sentiment data, but sterling remains well-supported.

• Australian consumer sentiment avoided a third consecutive monthly contraction last night but the risk-off flows away from commodity currencies into safe-haven currencies ensured this pair climbed by a cent from yesterday’s lows.

• Asian equities made heavy losses last night and Europe has opened very negatively this morning, suggesting it could be another tough session for risky assets like the AUD. This pair trades well above 1.61.

STERLING/NEW ZEALAND DOLLAR: Sterling saw further major gains thanks to heightened Greek tensions and declining milk prices.

• Milk prices have dipped to a two and a half year low, which does not bode well for the New Zealand economy or its farmers. Greece is the key trigger of sterling’s ongoing rise against the kiwi dollar and this is likely to be true for some time to come.

• Sterling is now trading up at 2.09 against the NZD, not far from last November’s one year high of 2.10. A test of this level looks likely to come soon.

STERLING/CANADIAN DOLLAR: Just when risks appetite looked to stage a recovery, Greece dealt sentiment another blow and the loonie sold off.

• US retail sales data was very disappointing yesterday and the loonie sold off in response, though the panic headlines out of Greece weighed even more. Oil prices have declined sharply this morning – Brent is now trading down below $111 per barrel, whilst US stocks are also likely to remain on the back foot, all negative for the CAD.

• Sterling is trading above 1.61 this morning and the risks remain to the upside amid prevailing risk aversion.