Ex Greek PM’s Warning On Potential Greek EUR Exit Rattles Market

• Ex Greek PM’s warning on potential Greek EUR exit rattles market
• BOJ leaves policy unchanged following worse than expected April Trade deficit
• JPY strengthens as risk off trade and equity sales outweigh poor trade data
• EURUSD falls back in late US trading following comments by Ex PM Lucas Papademos, that a Greek exit is being discussed in Athens
• EURUSD falls back to 1.2644 in late US trading but recovers ahead of the European opening as 1.2624 remains intact for now
• Gold falls back sharply as USD and JPY recover and commodity currencies suffer
• Greek bond spreads widen again as focus shifts back there from Spain and Portugal
• Pound edges to fresh lows ahead of UK April retail sales data at 9.30am this morning
• EURCHF continues to edge lower like a glacier towards SNB’s 1.20 line in the sand
• EURUSD slips back as Gold edges lower and European equity markets fall further from opening

Good morning. Well the EURUSD didn’t rally back from its opening levels again yesterday and the price just dribbled away to around 1.2740 by the London close.

Then well after that in US trading the level was breached convincingly as US equity gains turned sour and the Dow slipped into negative territory, forcing gold and commodity currencies lower and the dollar generally higher.

Even the USDJPY traded through 80 as short positions were squeezed ahead of the Japanese April trade data and the BOJ interest decision.

The price has already moved up earlier from the 79.60 level following the move by ratings agency Fitch to lower Japan’s sovereign credit rating by one notch locally and two notches in foreign currency terms to A+.

That news helped push the JPY backwards all day yesterday and it did trade as high as 80.15 in late US action.

It has recovered overnight ahead of the London opening and is back under 79.60 once again as the dreaded risk off dynamic sees a light back into Yen and the USD. That of course in JPY terms is rather absurd as I commented on the other day but it is what it is and we have to live with it.

It does of course make it nigh on impossible to make a sensible trading decision because gauging just how far or how long any risk on or risk off shift will last is most of the time simply not quantifiable- more on the JPY in a minute.

Turning back to the EUR – it was a comment by ex Greek PM Lucas Papademos that sent the EURUSD scurrying lower. He said that the possibility of a Greek exit was still being discussed in Athens and contingency plans were being addressed. In addition he estimated that any exit would cost between 500-1 billion EUR.

That seemed to slightly surprise the markets and most definitely was a shot across the bow of the EU heads as they meet again today to see if there’s anything they can do to appease the Greek public into effectively voting for Greece to remain inside the union next month.

In terms of that EU meeting today, I am told not to expect any news until after 5pm, but I will of course be live to any comments ahead of that timeline.

The real issue here would still seem to be on whether or not the Germans will ever agree to the issuance of Eurobonds as the chatter also surrounds the possibility of ‘project Bonds’.

They would be bonds issued by various countries specifically for the funding of infrastructure and regeneration projects to help boost growth and employment.

In terms of EU ministers actually arriving at any kind of consensus on anything is very much in the lap of the gods.

Whilst I would rule out the seriousness of the current situation actually galvanizing them into action, one has to look honestly at their track record over a long period of time now to be rather pessimistic on that prospect.

The EURUSD shot under 1.2700 following Papdemos’s comment and eventually traded as low as 1.2644 in the wee hours this morning. It has managed to recover ahead of the European opening to around 1.2675 against the backdrop of a very weak Asian equity market performance.

Therefore the prognosis for European equities to give back a lot of the good gains recorded yesterday looks very live for the opening.

This morning the focus in terms of economic data will be the UK April retail sales numbers and the BOE minutes from their last policy decision meeting.

The retail sales are expected to show a decline on the previous month so anything positive will be well received by the markets.

How far Sterling reacts negatively to a down number will of course depend on the extent of the drop assuming the BOE minutes offer a benign impact on the currency.

There is always the potential for surprises there, so it needs to be watched closely. Later at 11am we have the CBI Trends, total orders and selling prices for May.

This morning European equity markets have opened lower, as all eyes look to the EU finance ministers meeting later today. The EURUSD is currently steady around 1.2675 and still that 1.2624 level marks the cross over point to lower levels.