Concern over Germany has trumped the positive outcome in Greece



“RISK OFF”.  That was the theme of the day yesterday as risk aversion was the dominating factor in the market.  In response to the re-election of President Obama and the news from Europe that Germany has entered into recession, the DOW had its biggest drop of the year falling 312.95 points and the EUR after initially rallying fell below and stayed below the long standing support level of 1.2800.

The DOW fall brought the market below the psychological 13,000 support level to finish at 12,932.73.  Initially the Nikkei and Hang Seng fell at their openings, however the Nikkei rallied to end up slightly positive while the Hang Seng continued to fall ending their session down almost 600 points.

Commodity markets are somewhat split.  Crude oil prices are nearing the 85 dollar level, but gold has remained well bid as with President Obama’s re-election, the FED’s QE program is expected to continue.

The EUR remains weak, even though the Greek parliament was able to approve the austerity measures that were needed to allow the next tranche of bailout funds.  Rioting in the streets by protesters continues in Greece as citizens show their displeasure over the government’s actions.

The ECB and the BOE both announce their rate decisions this morning.  While no rate changes are expected from either central bank, the market will certainly focus on the commentary that comes from ECB President Draghi following the ECB decision.  The comments are expected to be somewhat dovish, and traders will look to see if there are any further comments made about Germany.  Yesterday, Mr. Draghi announced that the latest data showed that the problems that have affected the Eurozone are now starting to affect Germany.  German exports had their largest drop since last December falling well further than forecasts had predicted.

Apparently concern over Germany has trumped the positive outcome in Greece.  It should be noted that while the austerity measures were approved, the vote was very close as only 153 members of the 300 seat parliament voted in favor.  The problem with Greece is that there is no confidence that any of these approved measures will be able continue which will allow Greece to keep receiving bailout funds.

AUD and CAD have moved in different directions over the last trading day.  USD/CAD remains slightly firm though below parity, while the AUD tries to hold the 1.0400 level and was given good news as employment in Australia continued to increase in October after rising in September.

The next item traders will begin to focus on is the “fiscal cliff”.  As defined, fiscal cliff is the conundrum that the U.S. government wil face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.  Among the laws that are set to change at midnight December 31, 2012, are the end of temporary payroll tax cuts, which will result in a 2% tax increase for workers.  Also included are the beginning of taxes related to President Obama’s health care law.  There will also be spending cuts that will go into effect for over 1,000 government programs including defense and Medicare is in line for “deep, automatic cuts”.  This subject will be further analyzed in the coming days.

As far as today is concerned, the overnight nor’easter that has brought plenty of snow to the New York metropolitan area could effect liquidity as there may be an absence of some traders in the markets as new power outages and travel difficulty may prove to much for traders to get to work.  The EUR remains “offered” and should continue to track lower.  It is currently (4:50 am) trading below 1.2740, with the next support at 1.2720.  The EUR is getting a bit oversold so there should be some pullback and if President Draghi says anything remotely positive we could see a jump, but I would not expect it to break above 1.2780.

DOW Futures are higher this morning, so we could see some reversal to yesterday’s sell off. We shall see where we are after the central bank announcements.


About

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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