This week, it would appear that Greece is now closer perhaps than ever from defaulting on its debt. Despite the factthat we are still 11 days away from the 30th June deadline at which Greece will be required to pay the IMF €1.6bn for the bundled debt obligations of June, the negotiations are no closer to coming up with the goods for a successful deal. The curious situation is that anyone looking at the euro would probably be wondering what all the fuss is about. However, looking at the Eurozone sovereign bond markets shows that there is less of a sanguine view of the situation. The bond markets are showing the strain of Greece far more than the euro. Perhaps this could be ready to filter into trading on the euro too in the coming week. Will Greece finally be a drag on the euro?
The price of EUR/USD was boosted by a dovish Fed meeting on Wednesday evening and subsequently even had a sniff at the key long term resistance at $1.1466. Despite falling back with a slight correction the outlook remains fairly decent. Technical indicators suggest that a consolidation has been in place for around two to three weeks now and shows litle significant sign of a correction.
However, in the past few weeks the bond markets are showing the strain. The push higher on the bund yield has been a big diver of market sentiment recently and the positive correlation between the Bund yield and the euro has been strong. However, the yield on the German 10 year Bund has been falling in the past week as investors have opted towards the safer haven Bund. This has come whilst the euro has looked to move higher. Tehrefore, the correlation has not been working so well. The trend of the past few months would suggest that this move is unlikely to continue for long. If the Greek impasse continues in the coming days then the euro is likely to come under pressure again.
Also the spread of peripheral over core Eurozone bond yields has been widening. In the past week or so that spread has extended to a 10 month high. As reflected in the spread of the Spanish over German 10 year yield has pushed out to over 1.4%. Again, this would suggest that bond traders are once again preferring the safety of the German Bund over the relatively riskier peripheral Eurozone bonds (in this case the Spanish 10 year). This again is a sign of the increased concern over Greece and the chain reaction that a potential default on Greek debt could have.