Market as producer: dollar gets a Wild West scenario and Greece - Vienna's forest fairy tales

The stocks of Greek banks dropped more than by 60% at the beginning of the last week
Last week was saturated with news and price drive: NFP, "the British Thursday", SNB with its currency interventions and active decline of raw materials markets were successfully turning attention from Eurozone. It is to no purpose, since a new nerve knot has been developing there. According to Moody Analytics, European companies, against the background of Euro QE are in no hurry to increase the volumes of investments; just the opposite, they move into cash and redemption of their own stocks. Investments into equipment and infrastructure stay on 19.5% of GDP and that complicates the long-term growth of Eurozone. The scenario of Euro QE2 and Euro QE3 emergence is becoming more and more likely, and that allows to form a long-term downward trend in EUR/USD.

Greece is conducting a new round of negotiations with regard to financial aid program (EUR 85 billion are expected). The stocks of Greek banks dropped more than by 60% at the beginning of the last week; afterwards they recovered a half of that drop-down. The agreement is needed until August 20, otherwise the country will not be able to handle its current payment to ECB. Long-lasting German criticism of prodigal and lazy Greece was, in fact, designed to conceal an interest. The researches made by Leibniz Institute of Economic Research analysts showed that it was Germany that was the main beneficiary of the Greek crisis. Against its background, investors purchased German bonds as reliable assets, which reduced their profitability. Therefore, the cost of servicing the German government debt dropped dramatically, too; due that that Germany managed to "save" almost 100 billion euros (more than 3% of GDP).

Presently, Germany is the main opponent of writing off of the Greek debt and the main controller of the new fiscal discipline. However, according to the experts' estimates, the German economy has managed to generate the current budget as optimally balanced exactly due to the low yield of its bonds. Saving exceeds possible German losses even in case of complete Greek default on all obligations. Presently, the German contribution into salvation of Greece is around EUR 90 billion, and German taxpayers are in the black. The interest is confirmed by the fact that in the midst of standard difficult negotiations, Germany makes an offer for an auxiliary bridge loan for Greece (it is a form of short-term loan for the period of up to 1 year at a very high interest for payment of current obligations). That eliminates the threat of intermediary default and gives time for detailed discussion of differences. That offer is still in dramatic contrast with the general opinion of creditors; however, discussion goes on and Germany will, most likely, have its way. Nevertheless, if the Greek government does not vote for all the items of "preliminary measures" - the agreement regarding the 3rd aid program will be postponed again. The positive decision on the program will be the mid-term positive for euro: that will mean resumption of acceptance of the Greek state treasury bills secured by ECB and participation of Greek banks in Euro QE for capital inflow into Greek assets.

NFP data did not contain anything special. The message that 200 thousand new jobs is a normal thing has been forced up for a long time. That would be great if we forget about oversaturation of the American labor market with low quality labor force and that 5.3% of factual unemployment are officially published fake data. Calculation mechanisms that are continuously adjusted have also been designed to level out the undesired effect of statistical information. Studying the details BLS report shows that service sector is growing again, and base industry is losing jobs. The quality of the US labor market has not been improving since last summer, and Yellen personally has noted that repeatedly.

NFP turned out to be classical. The market's first response to the data reflected the fact of the above forecast (with revision of the information towards the black for June/May), and the second response was addressed to the quality of employment market. Financial market has always punished those overly self-confident. Trading robots played an important role in price jumps of currency pairs on August 7, and those who desired to get fast bucks got trapped practically on all main pairs. Profit taking and closing of speculative transactions based on strong data followed a dramatic peak, and afterwards, the movement returned to main trends. Now, only very weak numbers of August NFP (on the level of +100 thousand or below) may affect FRS plans regarding rates at the beginning of autumn.

This week's focus of attention - US data on Thursday (retail sales, weekly unemployment, price index of exports-imports), the numbers above the prediction must push dollar upwards. It is possible that there will be a FRS response to alternative researches of labor market by LMCI; however, Monday has not shown any dramatic deviation from the forecast; we will be waiting for the second part on Wednesday. Also, a report by the labor market indicator JOLTS (Yellen's favorite indicator) will be published on Wednesday. EUR movement is becoming weaker, NFP values are still putting some pressure, and now, EUR/USD pair is going to fall on optimism from FRS and on American data. For now, the psychological level is 1.1000. Strong supports of EUR/USD are in zone 1.0800/1.0750/1.0700, resistance – 1.0970/1.1000/1.1030/1.1100. The risk of mid-term penetration: upwards – 1.1120/1.1300, downwards – 1.0760/1.0660. Let's follow the news.

Author: Alexander Ward,
ForexChief Currency strategist