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By Shavasb Bohdjalian
Greece’s government pledged to place 30.000 civil workers in a “reserve pool” before firing them as part of a 6.6 billion-euro austerity package, which if implemented, would leave a 2012 budget deficit equivalent to 6.8 percent of gross domestic product, missing the 6.5 percent goal previously set with the EU, International Monetary Fund and European Central Bank, known as the troika. Troika inspectors agreed to the proposed 2012 budget.
The euro fell on news that the Greek government said it will miss its deficit target this year, even as it moves ahead with a plan to slash thousands of public-sector jobs to meet the demands of its international creditors.
Uncertainty also remained over the expansion of the European Financial Stability Facility, with the Slovakian government—due to vote on the expansion later this month—remaining split on the issue.
Greece has said that it will run out of cash around the middle of this month, possibly
resulting in a delay to payments of salaries and pensions, and likely further stoking discontent. Ahead of the October 13 meeting of the Ecofin, which will agree on whether or not the last batch of 8 billion euros in loan will be released or not, most analysts see little reason to expect a EUR-led reversal of USD strength.
With many Central Banks now buying dollars in defence of local currencies and in no appetite to diversify out of their dollars into euros, the only thing holding back the euro from recording more losses is its heavy over-sold situation as evidenced by Futures data.
Declining OPEC revenue (crude off some 20% in September) is also removing an important support under EURUSD as petro-dollars are not being converted into euros.
There are many important events this week that may have a major impact on market direction. The first major event on the calendar is Thursday when the Bank of England’s MPC meets on rates and the ECB also meets for rates.
Markets expect no change from the Bank of England but a resumption of QE2 in the UK is starting to be priced in from November, in line with last month’s MPC minutes which discussed the possibility of expanding the BoE’s bond purchase programme by another GBP 50 bln to GBP 250 bln.
Hopes for a rate cut by the ECB on Thursday have been dealt a blow by last Friday's big upside surprise on HICP, which came at 3.0% against 2.5%. This forced analysts to reduce their expectations for an imminent rate cut, at least for this meeting, which is the last under Jean Claude Trichet. But if the ECB does not deliver this month, most analysts will increase their expectations for a rate cut next month, as evidenced by poor retail sales figures from the eurozone and Germany in particular. Such confusion and mixed expectations may hurt risk appetite and in turn EURUSD, but the fact that the market is heavily short gives rise to expectations that despite the negative news and expectations, the time is right for a big market shake, which may see EURUSD rebound to 1.38-1.40, after which the next major downmove may start.
Market participants will also pay close attention to Friday’s figures on non-farm payroll growth in the US and the unemployment rate, which is expected at 50k and 9.1% respectively. If the figures disappoint as was the case last month, this may give rise to expectations that the Fed may be forced to launch QE3 much sooner than expected and hence support EURUSD at the lows.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
