Weekly Forex Outlook: Euro (EUR) in Anticipation of Greek Deal

on Nov 26, 2012

With the new Greece funding meeting scheduled on November 26, the outcome of the efforts of Eurozone finance ministers to finalise a deal is likely to set the tone for the euro. The single currency, which last week advanced on Greece-related optimism, hit a seven-month high and held a near one-month high against the US dollar.

Greece Discussions to Determine Euro Sentiment
On 26 November 2012, Reuters reported that the single currency rose to as high as ¥107.135 on trading platform EBS, the euro’s strongest level since late April. The euro, however, lost 0.2 percent against the greenback to about $1.2956, after having reached $1.2991 on November 23, the strongest level since late October. “There is optimism around in regards to the euro area’s ability to achieve a deal on Greece,” notes Emma Lawson, senior currency strategist at the National Australia Bank (ASX:NAB), as quoted by Reuters.

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Other analysts, however, are more cautious, particularly given the election results in Spain, with pro-independence parties winning the regional vote in Catalonia. Bloomberg quoted Masafumi Yamamoto, chief foreign-exchange strategist at Barclays Plc (LON:BARC), as saying that the election result was not positive for the single currency. “Spain will continue to delay asking for financial assistance,” noted Mr Yamamoto. “The market may shift its focus to Spain and the poor economic fundamentals in Europe once we confirm aid for Greece.”

**Yen Posts Limited Gains, Likely to Remain Under Pressure**
The yen, which last week plunged to seven-month lows versus both the single currency and the greenback, recovered some losses, adding 0.3 percent to 82.13 per dollar, as reported by Bloomberg on November 26. The Japanese currency’s gains, however, were limited with speculation about the upcoming election in December and expectations about aggressive monetary easing by the Bank of Japan (BOJ) continuing to weigh on the yen.

!m[Japan’s Political Situation Continues To Provoke Yen (JPY) Weakness](/uploads/story/893/thumbs/pic1_inline.png)“There is a clear idiosyncratic yen weakening trend in play,” noted John Horner, a currency strategist at Deutsche Bank AG (FRA:DBK), as quoted by Bloomberg. A “changing political landscape and the prospects of more aggressive Bank of Japan action in the near future all look to keep the yen under pressure for the time being.”

**“Risk-On” Mode**
Greece-related optimism benefitted the Australian and the New Zealand dollar on November 26, with Bloomberg reporting that the Aussie traded for $1.0454 and its three-month implied volatility dropped to 7.3 percent, the lowest since July 2007. New Zealand’s dollar was little changed at 82.35 US cents after reaching as high as 82.51 near the end of last week. The European ministers’ meeting “might be a little bit supportive for Aussie and kiwi if something positive comes out,” notes Joseph Capurso, a currency strategist at the Commonwealth Bank of Australia (ASX:CBA), as quoted by Bloomberg. “The good news is already in there. I think they might see a little bit of upside, but not a great deal.”
Reuters quotes BNP Paribas (EPA:BNP) analysts as seeing the “risk-on” mode as continuing, if the deal on Greece is indeed finalised and the US made progress as regards the looming fiscal cliff. “Although a swift deal is probably too optimistic, we believe an eventual compromise will be achieved well before the end of the year,” noted the analysts referring to the cliff, as quoted by Reuters, adding that they expected the US Federal Reserve to expand its quantitative easing programme in December. “(This) combination of positive developments should, in our view, maintain this risk momentum over the coming weeks.”


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