Forex Alert: Beware the Coming Greek Deficit Plan

Even those not interested or involved in currency trading need to be aware of some potentially very market moving events likely to hit all asset markets around January 20th – when Greece presents its plan for reducing its deficit to a group of already concerned EU officials.

The story develops as follows, and is a classic example of why anyone active in financial markets needs an ongoing awareness of major events in currency markets.

Recent news of a poor start to US earnings season courtesy of Alcoa (AA), and China’s monetary tightening have hurt risk assets like stocks, commodities, and higher yielding currencies like the euro.

Yet the euro has held up well vs. the dollar, and the EUR/USD remains in a very tight trading range over the past few days and at the time of this writing.

Another reason the euro should be falling: a very disconcerting report just out from the EU’s Greece task force that basically says Greek official financial data is unreliable – and the official data already looks terrible.

So why is the euro holding its ground? Here’s what we found:

The likely reason for the euro’s strength despite the ongoing Greek drama is the most recent CFTC report, which showed speculative short positions in the EUR/USD neared record highs. This suggests that at that time (the report is at best a week old, issued each Tuesday about the prior week), everyone who wanted to be short the EUR/USD was most likely already short.

But this Greek drama is still just beginning to unfold.

The Greek situation remains at the forefront of concerns for the Euro-zone and the euro, and the next step, following the European Commission’s rather negative assessment of Greece’s data services, will likely come around Jan 20, when Greece should submit deficit plans to the European Union.

Here are some details, courtesy of UBS:

The EU’s task force in Greece announced that there are ’significant weaknesses’ in Greece’s data services, citing ‘inappropriate adjustments’, ‘lack of independence’ and ’severe irregularities’ as just some of the problems. Greek bonds sold off on the back of the release as the EU is likely to release a damning report on the government’s figures and current fiscal outlook. These fiscal pressures will continue to weigh on the EUR and the ECB may also need to act if further downgrades occur in the short term as a result of the EU’s findings.

What it means for traders and investors:

Currency traders should thus be on the lookout around January 20th for volatility surrounding the release of this report and possible further downgrades to follow, as the various ratings agencies, recently awakened by the Dubai World announcement, are unlikely to be caught asleep again, especially by an obvious fiscal bad-boy like Greece.

Investors and traders of any other asset class must also be on alert. The days before and after the report, which could well bring further credit downgrades for Greece, are likely to further pressure the euro. Because the EUR/USD pair comprises about 30% of all currency trading, that means the US dollar is likely to rise, and reverse current up trends in higher yielding currencies and commodities. Global equities markets, already at annual highs, could well respond to these fear inducing events by pulling back, though much depends on how US earnings season goes in the interim.

Disclosure: No positions