EUR/USD Hovers Above 1.3 As Markets Ignore Greek Default Risks

The euro continues to hover above 1.3 level against dollar after stabilizing from yesterday's sharp sell-off. The final result of Greek election had New Democracy and Pasok secure only 149 out of 300 seats. New Democracy leader Samaras has already stated that he failed to form a new government and has "handed back the mandate" to the president. Analysts interpreted the result of the election as reflection of the sharpest decline in public support for mainstream parties in decades and showed the public's strong opposition against austerity. Greece is facing an immediate task of securing the next tranche of bailout from EU/IMF or it may need to default its debt after running out of cash.

The reactions from financial markets yesterday were somewhat puzzling but also revealing. Most European stock indices closed nearly flat. Indeed, France CAC 40 was up 1.65% while German DAX was up 0.12%. The only major exception was Greece's Athex composite which was down -6.67%. US equities recovered from an earlier sell-off with the Dow down only -0.23% at close. Asian markets also stabilized and recover mildly today.

While EUR/USD dived sharply to as low as 1.2954, it quickly found some bid to push it back above 1.3. Bond markets were also steady. It seems there was a consensus that the current problem in Greece is mostly only a Greek problem, but still remains a eurozone problem, as well. And, Greek default is already priced in.

Nonetheless, the common currency remains vulnerable as the election results highlighted increasing opposition to austerity. It will now be even more difficult for Germany to push fiscal reforms after breakup of "Merkozy" partnership. Also, Spain and Italy, much larger economies than Greece, will remain in the spotlight. In particular, markets will watch what is Spain's plan to help banks getting rid of toxic assets this week.

Elsewhere, Australia reported a widening trade deficit in March. Trade balance showed AUD -1.59b deficit, largest in more than two years and the third straight month of deficit. Exports rose 2% to AUD 24.5b while imports jumped 5% to AUD 26.1b. UK BRC shop price rose 1.3% yoy in April, RICS house price balance deteriorated to -19%. German industrial production and Canadian housing starts will be released later today.