Tuesday, July 5, 2011

FOREXYARD: Forex News Blog

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S&P Says No to Greek Debt Rollover

Posted: 04 Jul 2011 05:26 AM PDT

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Just as quickly as EU officials thought they were out in the clear of the Greek debt crisis, the rating agencies pull them back in. Early in the morning S&P announced that the French led Greek debt rollover plan in its current form would be considered a credit event, sending EU officials back to the drawing board.

In a release earlier this morning S&P announced it would view both French banking proposals as a "selective default." The view by S&P is discouraging as it is the first of the three major rating agencies to comment on the proposed rollover plan. S&P cited both proposals would return a reduced value to the holders of Greek debt than previously expected under the original debt agreement. Under ECB guidelines the European Central Bank will not accept Greek debt as collateral in exchange for ECB liquidity after a default. While the decision by S&P is certainly a negative for the euro, the 17-nation currency was off its early highs versus the dollar but has been able to maintain its position above the 1.4500 level, perhaps due to expectations of an interest rate hike by the ECB this week. Initial resistance is found at the top of the consolidation pattern at 1.4520 and a solid close above here would likely target 1.4700. To the downside 1.4440 from the June 22nd high is the initial support.

Cable was stronger after construction PMI survey was in-line with consensus forecasts, falling to 53.6 from 54.0. Sterling was initially supported as were gilts, but the rally faded as the European trading session extended into the afternoon hours. Recent UK economic data releases have been in the doldrums and therefore sterling got a lift from the data. Talk of an additional round of quantitative easing at the next BOE meeting may keep sterling on its back foot in the near-term. Market positioning has also fallen out of favor with sterling as Friday's CFTC Commitment of Traders report shows speculators are now net short sterling for the first time since mid-January, a possible signal of a shift in the long term trend of the GBP/USD.

The majors will likely be range bound for the remainder of the day, typical of trading conditions with tight liquidity as US markets will be closed in observance of Independence Day. Happy 4th of July.

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