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Talking Points

• Greek Election Gives Pro-Bailout Parties Enough Votes to Form Coalition
• US Dollar, Yen Fall on Fading Haven Demand But Outlook Still Supportive
• Empty Data Docket Puts French Bond Auction, G20 Commentary in Focus

The US Dollar and Japanese Yen fell in overnight trade after a general election in Greece over the weekend produced enough votes for the main pro-bailout New Democracy and Pasok parties to form a coalition government. The outcome downgraded fears of an imminent Greek exit from the Eurozone, boosting risk appetite and weighing on the go-to haven currencies. Investors feared a disorderly ejection of the country from the currency bloc may materialize if Syriza – a party pushing to renege on the terms of the EU/IMF bailout – were to emerge victorious. The MSCI Asia Pacific regional benchmark stock index added 1.5 percent.

On balance, the Greek election outcome effectively returns markets to the status quo in place six weeks ago before the first attempt at electing a new administration ended inconclusively. Now as then, the evolution of the Eurozone debt crisis appears likely to proceed at the pace of a slow simmer rather than a sudden rupture triggered by a one-off event. Most critically for the Euro, none of the structural headwinds facing the single currency have been dismissed. The Eurozone still looks likely to find itself in recession by the end of the second quarter. It seems only a matter of time before that translates into building ECB rate cut expectations, weighing on prices.

For sentiment trends in general, the negative implications of a Eurozone slump for global economic growth have become no less significant, casting the recent recovery in risky assets as corrective in the context of a larger risk-averse dynamic still in play. This makes for a negative outlook on growth-geared currencies including the Australian and New Zealand Dollar while arguing for gains in the safe-haven space, favoring renewed gains in USD and JPY over the coming weeks and months. In the meantime however, S&P 500 stock index futures are pointing higher, suggesting the risk-on mood will probably carry forward at least in the immediate term (although if last week’s Spanish bank bailout is to be repeated, that could be mere hours).

Looking ahead, an empty European economic data docket leaves a French bond auction as the solitary piece of scheduled event risk on the calendar. Paris will sell €8.7 billion in bills up to 12 months in maturity. Traders will look to bid-to-cover and average yield readings to gauge Eurozone sovereign risk jitters. While the short tenor of the debt on offer would typically make for a lackluster response from price action, the proximity of the Greek election may amplify the results’ impact, which traders may treat as a referendum on the ability of the vote to meaningful relief. Sideline commentary from the G20 meeting getting underway in Mexico will also be sought out for guidance.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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