Over the weekend, Greek Prime Minister Lucas Papademos won parliamentary approval for austerity measures to secure a second international bailout and avoid national bankruptcy.
Out of 300 lawmakers, a total of 199 backed the bill. The passing of the austerity bill was a boon for market traders who heaved a sigh of relief and piled on risk trades; causing markets to rally.
The temporary cheers in the financial world seem to hide the deep resentment among the Greeks. Before bill was passed, protesters and rioters were having a field day, setting cinemas, cafes, shops and banks ablaze in central Athens.
A summary of the bill includes:
1. 22% reduction in the minimum wage
2. Cutting the real value of private-sector bond holdings by some 70%
3. Total budget cuts to total 3.3 billion Euros this year
Besides the Greek resolution, there’s another reason which underscores the uptrend in risk currencies recently – carry trades.
“There’s less nervousness in the market in general,” Jose Wynne, head of North America foreign-exchange research at investment banking unit of Barclays Plc, said. “Now that the central banks are pumping on one side of the system, you have people jumping on carry trades everywhere.”
Besides the “traditional risk currencies” of New Zealand, Australia and Canada, even the “exotics” like the Mexican Peso, Brazilian Real and the South African Rand have started to rally.
These countries have benchmark interest rates up to 10.5%, compared with between 0-0.25% for US and Japan.
Especially at the start of the year, fund managers tend to sell the “low-yielders” (USA and Japan) and buy financial instruments in countries which have the highest interest rates. This carry trade effect contributes to the risk rally.
This simple strategy has borne good results so far.
Since the start of 2012, the Mexican Peso has appreciated 9.6% against the dollar, leading gains among 16 major currencies tracked by Bloomberg. The Brazilian Real has posted an 8.4% increase while the New Zealand dollar has rallied 7.2%.
For the carry trade to perform well, a working tandem must be a reduction in market volatility. This already seems to be happening – according to JPMorgan Chase & Co. Index – market volatility dropped last week to the lowest since August 2008.
All these are good signs for risk – but with dark clouds hanging over the world economy, the real question is, “for how long?”
Trade Call
Long EUR/JPY at 103.30
On the H1 chart, EUR/JPY is currently trading in a range after an uptrend. Support level is located at 102.25 and Resistance is found at 103.20.
We will go long at 103.30 after prices breakout of the range. A protective stop of 60 pips is placed at the mid-point of the range at 102.70.
We will have 2 targets on this trade, exiting the final position at 104.50.
Entry Price = 103.30
Stop Loss = 102.70
1st Profit = 103.90
2nd Profit = 104.50
