Beware of a Greek Head Fake

For global markets, the past week has been an opportunity to rally thanks to the Greek bailout “deal”. We use the work “deal” sceptically as we have serious reservations that what occurred in Brussels truly amounts to a silver bullet. In reality, here at FX Strategy, we cautiously suspect that all that has occurred is that the proverbial Greek Can has been kicked a little further down the road – prolonging the inevitable default of Greece (and perhaps it’s ultimate return to the Drachma..).

We highlight this for FX Strategy readers because it’s important to consider that this could turn out to be a short term rally before markets wake up and smell their greek coffee and realise Greece is still doomed!

There are a few catalysts for this enlightenment. One is the recently introduced resolution of the German Parliament blocking any boost to the EU bailout funds – if this legislation passes it is believed it will throw the whole Greek rescue “deal” into jeopardy.

Secondly, with the latest forecast showing the euro zone has possibly already entered a double dip recession – it might not be too long before the market is tuned in to this economic hazard.

Thirdly, inflation has ticked up through the euro zone due to rising oil prices. So you might seriously start to wonder if the Greece bailout will even last until the scheduled April elections.

Possibly the biggest positive to come out of this “deal” is the potential to limit contagion. Although a bunch of other euro zone countries have a multitude of problems, it is just possible that given time they can make enough adjustments to strengthen their balance sheets and this is almost certainly an easier task without having to deal with the chaos of a Greek default right now.

If that is how things play out then the EUR may just continue to rally, but FX strategists are encouraged to be vigilant in watching and to beware of a greek head fake and hence a false rally in the EUR.