Euro Rallies on Greek Bailout, but Traders Unconvinced and EURUSD pulls back

• US Dollar slips on Greek Bailout, Dow Jones Closes above 11000
• Australian and New Zealand Dollars Give Back Gains

Euro Rallies on Greek Bailout, but Traders Remain Unconvinced and EURUSD pulls back
The Euro rallied sharply against the US Dollar and other major counterparts as the European Monetary Union and International Monetary Fund announced details of a 45 billion euro financial aid package for beleaguered Greece. Yet the Euro gave back about half of its earlier gains against the Greenback as global investors remained skeptical of the move. The plans call for substantial loans at a below-market interest rate of 5 percent—in theory setting a ceiling on yields for recently-weak government bonds. In practice, however, Greek government debt continues to yield as much as 6.67 percent for 10-year maturities. Said level represent a substantial 350 basis point premium over the equivalent benchmark German security and emphasizes that investors remain unconvinced that the worst is past for Greece and the broader Euro Zone.

Implications for the Euro are arguably clear: investors will continue to react to Greek fiscal developments despite the announced contingency plan. This should especially be true ahead of a planned €1.2 billion of Greek 3 and 6-month bills on Tuesday. Current market rates imply that said securities would be sold at anywhere between 3.11 and 4.80 percent—an almost-unbelievable 296bp and 438bp above the equivalent German yields. Traders clearly continue to demand a substantial premium in order to buy Greek debt, and it will be very important to watch the results for the upcoming bond auctions.

Euro traders should otherwise keep an eye out for German and French Consumer Price Index inflation figures due tomorrow morning. Consensus forecasts call for relatively lackluster results. Yet finicky markets could post sharp reactions to any considerably above-forecast inflation prints.

US Dollar slips on Greek Bailout, Dow Jones Closes above 11000
The US Dollar fell considerably against the Euro and other currencies through early Sunday trade, hurt by the Euro Zone’s planned bailout and a relatively short-lived rally in risky asset classes. As the dust settled, however, the Greenback finished Monday’s North American trading session roughly flat despite a Dow Jones Industrials Average close above 11000. It was the Dow’s first such close since September, 2008 but came on the second-lowest trading volume of the year.

The safe-haven US Dollar and Japanese Yen continue to slide against high-yielders such as the Australian Dollar as major financial risk barometers set fresh highs. Yet low volume and participation on such rallies gives reason to believe that recent gains are unsustainable. It likewise serves to note that the S&P 500 Volatility Index (VIX) now trades at pre-financial crisis levels near 16 percent. Given that volatility tends to revert to the mean over time, such a slowdown in price moves warns that this may prove the calm before the storm. Tuesday’s US Trade Balance numbers could spark some short-term volatility across US Dollar pairs, but we may have to wait until Wednesday’s combination of Consumer Price Index and Retail Sales results to spark greater volatility.

Australian and New Zealand Dollars Give Back Gains
The Australian and New Zealand Dollars were the worst-performing G10 currencies on the day, retracing some previously heady gains through a relatively slow day of trading. Major news outlets blamed a relatively inconsequential Australian Home Loans report for the Aussie declines, but in truth AUDUSD pullbacks began well-ahead of said data release and continued well-after. It seems more or less like a case of minor profit taking within the context of a 4.3 percent advance in just under 3 weeks of trade—hardly a cause for alarm. An ongoing slowdown in AUDUSD volatility amidst impressive appreciation nonetheless warns that market conditions have become unsustainably calm. Three-month AUDUSD volatility expectations seen through FX Options now stand near their lowest levels since the onset of the financial crisis. Much like we argue for the S&P 500 and the Dow Jones Industrials average, a reversion to higher volatility could almost certainly bring further AUD pullbacks.

Technically speaking, today’s AUDUSD candle marks a substantial “outside day” and the large wick to the topside suggests buying activity has slowed considerably. Though this author has been caught on the wrong side of the Australian Dollar trade many times, carry traders should monitor any sudden reversals in the S&P 500 and other key risk barometers. Recent price action may very well prove to be the calm before the storm—especially with the VIX below 16 percent for the first time since 2007.

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