EURUSD: Greek Fire Sale

“Greek fire was an incendiary weapon developed ca. 672 and used by the Eastern Roman (Byzantine) Empire. The Byzantines typically used it in naval battles to great effect, as it could continue burning while floating on water.” (Wikipedia)

The normally quiet post-Christmas, pre-New-Year’s trading week started off with a bit a of a bang in today’s European session after Greece’s Parliament failed to agree on a new president for the third and final time. The only candidate, Stavros Dimas, who was backed by Prime Minister Antonis Samaras, failed to secure the necessary 180-vote supermajority, calling the authority of the ruling New Democracy party into question. This failure will lead to new parliamentary elections, likely on January 25th. Much like the deadly historical weapon, the current Greek political fire is only growing in intensity as policymakers seek to put it out.

The upcoming election will be a particularly big event risk for the euro and European stocks because the most recent opinion polls in Greece point toward a victory by the radical far-left Syriza party, which favors defaulting on Greece’s debt obligations and canceling the terms of the EU/IMF bailouts. Greek 10yr bond yields spiked to 8.8%, suggesting that fixed income traders are growing increasingly uncomfortable with the country’s ability to service its debt, and the Greek stock market tumbled by more than 10% in the wake of the failed presidential bid.

Of course, as we heard repeatedly back in 2009 and 2010, Greece represents less than 2% of the Eurozone’s GDP, so its issues are not a disaster in and of themselves, but any sort of debt renegotiation by Greece could pave the way for similar deals by radical parties in the more important eurozone economies like Italy and Spain later this year. The biggest risk from here is that the Greek political fire spreads to its periphery neighbors, as it did back in 2010/11.

Technical View: EURUSD

Despite the big drops in Greek-specific assets, EURUSD has held up well so far today. The world’s most widely-traded currency pair has actually edged back up to 1.2200 in the wake of the announcement, leaving rates in the middle of the recent 1.2165-1.2220 range. With minimal data on tap, volatility in the pair may remain subdued this week. That said, the recent bullish divergence on the 1-hour RSI indicator suggests that the bears may be losing steam and that a more extensive bounce is possible if rates break back above 1.2220 resistance.