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Fear of contagion is sweeping through the Forex markets this morning as traders worry that Greece‘s ongoing sovereign debt problems are going to spread throughout the Euro Zone. Investors are reacting as if Euro Zone officials have turned reactive rather than maintaining the proactive stance they had assumed over the past week or so following what appeared to be the passing of a workable Greece bailout agreement.
Rather than focus only on Greece, EZ officials may be forced to turn their attention on preventing a Greek debt default from infecting the other debt-laden Euro Zone economies such as Spain, Portugal and Ireland. Some sources are have even upgraded the list to include Italy, Belgium and France. This news may have prompted European Central Bank Governing Council member Nout Wellink to state that he favors boosting the European Financial Stability Facility to secure additional support for a second Greek aid package from the private sector. This begs the question, could the sovereign bailout fund for Euro Zone countries already be out or money? Or how close are we to a total meltdown in the EZ?
Based on the 140 basis point jump in Greek 2-year yields to a new high of 27%, it looks as if fears of contagion have intensified with no solution to the problem in sight as officials brace for a possible intensive negotiation process over the second Greek aid package that may take weeks to hammer out. In the meantime, global investors are wasting no time, shedding risky assets in the fear that a major default is imminent and that credit markets may face the possibility of locking up like they did in 2008.
Technically, the sell-off in the Euro is posing a serious threat to the current uptrend. A trade through 1.3925 will turn the main trend down. Based on the 2011 range of 1.2815 to 1.4887, expectations are for a near-term test of 50% of this range at 1.3851.
