The most recent polls suggest that the SYRIZA party – an acronym that translates to “Coalition of the Radical Left” – will improve on its second place finish in the recent election and could lead all other parties with nearly 30 percent of the vote. The SYRIZA leader, Alexis Tsipras, ran in the last election on a platform that would keep Greece part of the Eurozone, while rejecting outright the austerity requirements mandated as part of Greece’s continued financial support and Eurozone membership.

The idea that Greece could not only remain part of the Eurozone but also continue to receive funding all the while willfully refusing to implement its agreed upon spending cuts defies all logic. What’s more surprising, is that with the SYRIZA leading the polls, it appears many Greek voters believe Tsipras could actually pull this off.

Greece is Running Out of Time

On Tuesday, German Chancellor Angela Merkel sought to regain control of the message stating that Greece must either abide by its earlier agreements, or exit the region and return to the drachma. Merkel went on to say that the uncertainty of the situation was damaging to the entire Eurozone and “solidarity for the euro” was at risk so long as the crisis was allowed to fester.

For his part, Tsipras, apparently remains convinced he can have it both ways and while officials continue to favor brinksmanship over policy, Greece stumbles inexorably towards a deadline that cannot be altered. Greece is running out of money with only an estimated 2 billion euros remaining in the kitty. At best, this will keep the country afloat until late July or early August at the latest.

The agreement signed last year calls for another 30 billion euros in support for Greece but this is contingent upon Greece imposing another 11 billion euros in spending cuts. Access to this money is imperative if Greece is to avoid defaulting on its next round of debt repayment.

Between now and the point at which Greece runs out of money, one side will be forced to blink if Greece is to remain within the Eurozone. By voting in Tsipras and the SYRIZA, Greek voters are betting that it will be the Eurozone leaders that find they do not have the stomach for the unknown surrounding a Eurozone sovereign default.

A floating-rate note sold a decade ago by Europe’s most- indebted nation matures today. Repaying the security would disadvantage investors who took losses in the bond exchange and voters facing spending cuts. Reneging on the obligation also would constitute a default, triggering derivatives contracts and clauses requiring the settlement of other unswapped bonds. Meantime, the country has no government to make the choice.

“The political vacuum means it’s very difficult for the interim government to take what are essentially political decisions about burden-sharing,” said Myles Bradshaw at Pacific Investment Management Co. in London, manager of the world’s biggest fixed-income fund. “It would be very difficult for Greece to pay bondholders and then turn around and say they’re cutting pensions to pay the bonds.”

Reuters reported today that the bond will be paid, citing an official it didn’t name. Talks between Greece’s main parties following the May 6 elections failed to reach agreement on forming a coalition, paving the way for a second election next month. It’s possible no government will be in place until at least July. The Syriza party led by 37 year-old Alexis Tsipras, who favors defaulting and an end to economic austerity, placed second in the elections with 16.8 percent of votes. The group is ahead in current polls.

Bloomberg

The 0.1 percent gain followed a 0.7 percent increase in March, Commerce Department figures showed today in Washington. Economists projected an advance of 0.1 percent, according to the median forecast in a Bloomberg News survey.

Categories like building materials, clothing and department stores dropped in April as the weather-induced gains of the first three months of 2012, the warmest on record, faded. Weaker employment growth will probably also make it more difficult for households to match last quarter’s pace of spending, which was the fastest in more than a year.

“The consumer is holding up,” said Neil Dutta , an economist at Bank of America Corp. in New York who correctly forecast the sales gain. “The key thing here is to determine to what extent the weather had an effect, and it’s pretty clear if you look at the components there was some weather impact.”

The cost of living was little changed in April as fuel prices dropped, and manufacturing in the New York region expanded this month at a faster pace than projected, other reports showed.

Bloomberg

German gross domestic product (GDP) rose 0.5 percent from the fourth quarter of 2011, when it fell 0.2 percent. Growth was mainly driven by net trade, as exports rose and domestic consumption increased, while investment declined.

In the meantime, according to a report published by the European Union’s statistics office, GDP in the 17-nation euro area stagnated in the latest quarter compared with the prior three months as a result of the continuing debt crisis.

Eight euro zone nations are already in a recession, commonly defined as two consecutive quarters of contraction. Italy’s economy shrank 0.8 percent in the quarter, while the Netherlands saw a decline of a 0.2 percent, and Portugal decreased by 0.1 percent. France, the region’s second-biggest economy, avoided contraction, recording zero growth in the first quarter.

In Eastern Europe, Hungary is heading towards a recession. The Hungarian economy contracted 1.3 percent from the previous three months after stagnating in the fourth quarter of 2011. Czech GDP shrank 1 percent, which indicates the third consecutive quarter of contraction, and Romania recorded the second quarter of decline with a 0.1 percent drop.

The economies of Greece, Italy, Spain, Portugal and the Netherlands are all projected to shrink in 2012, with Spain the only euro member seen remaining in contraction into 2013.

An escalation of the sovereign-debt crisis is the biggest risk to the euro zone outlook, according to the European Commission. The region’s GDP will probably drop 0.3 percent this year before increasing 1 percent in 2013.

Source: Bloomberg

The current relevant US data is likely to accentuate the slide in EUR. Today’s US manufacturing, retail sales and inflation data is expected by analysts to remain relatively “modest” and still provide proof that the US economy’s recovery “is slowly muddling” along. Obviously to many, coupling the releases to what’s really occurring in Europe should keep the “big” dollar looking attractive to most. Any upside surprises in the data will only prove to be more favorable for long dollar positioning, while the worse than expected data is likely to be shrugged off by the market. Is this to be a win-win situation? For the present, however, maybe record short positioning will have some influence on the one directional play.

German economic expectations have fallen somewhat aggressively this month after rising for five consecutive releases (10.8 vs. 23.4). It obviously reflects the shenanigans occurring in Greece and the French political results. Collectively, both situations seems to be raising doubts about the commitment from some European Governments to fight the periphery regions debt crisis. Even capital markets is beginning to hear the dissent amongst the ranks and a bit more vocalization from Central Bankers. Once dealers smell blood, they are like rabid animals. Just see what they are doing to the periphery yields. Breaking down the German releases, the market is content in using the forward looking ZEW component to reverse the German GDP gain (+0.5 vs. -0.2%) in the single unit this morning. It seems that investors remain content to sell “this” persistent jump in the EUR.

If the single unit cannot rise on good news, like this morning’s German GDP print, solid demand and despite the speculative short positioning that has been somewhat covered and reversed at these lower levels, then these “quick” spec longs must be a tad concerned with their current positioning. Ever since late last week the market has slowly been reversing their short EUR position hoping for a quick uptick. Price action again has been mostly one directional and that’s not higher.

If US data decides to put a choke hold on the EUR later this morning, a run on the 1.2790-1.28 barriers does become a market option or target capable of squeezing some of the weaker spec longs out of their positions. The techie analysts see the 30-day upper and lower bolli-bands converging, which would suggest a “heightening in statistical volatility.” Price movement below 1.30 has lacked volatility, in fact it has been pedestrian in nature. The markets positioning is backed by tech analysts who still see the single currency wanting to trade higher, back to yesterdays top north of 1.29. However, Euro-zone bond spread widening would suggest that the EUR is far more comfortable trading lower for now!

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EUR: No Bounce, No Lift, Why own?

Both New Democracy and Pasok have so far been unable to form a new coalition. They both agreed to the required budget cuts in return for the last bailout, and as a result both parties suffered at the last week’s polls. Syriza, which came second, insists any new government must cancel austerity measures agreed in return for EU-IMF loans worth 130 billion euros.

Today’s meeting called by Papoulias will be with the leaders of two of the three biggest parties, and the head of the smaller Democratic Left party. If the President’s efforts fail, new elections will need to be called. The fear over holding new elections is that parties that oppose austerity measures required in the Greece’s bailout deal might do well again.

The European Financial Stability Facility confirmed that a 5.2 billion euro tranche will be released by the end of June, with 4.2 billion euros disbursed May 10. The remaining 1 billion euros will be released depending on Greece’s financing needs. Under the terms of the bailout, a new government will need to present an official plan on how it will save 11 billion euros next month.

Fitch Ratings said that if Greece would need another election, it would be doubtful that the Greek government could comply with the EU-IMF’s end-June deadline to propose further medium-term austerity measures. While Greece would probably be granted an extension to that deadline, any attempt to significantly renegotiate its program would be unacceptable to the so-called troika of the European Commission, IMF and European Central Bank. Greece will run out of cash by early July if the country’s creditors decided to withhold their next aid payment.

With no sign Europe’s leaders are prepared to renegotiate the deal, Greece could end up leaving the euro zone. Officials are already weighing up the fallout of a potential Greek withdrawal from the euro and how that would be managed.

EU finance ministers are due to meet in Brussels to discuss the Greek crisis later on today.

Source: Bloomberg

Risk assets have gotten little support from China’s RRR cuts over the weekend. Instead, investors prefer to hone in on Greece’s inability to govern itself and to the poor showing by Merkel’s Christian Democratic party in regional elections yesterday. The electorate has clearly rejected her austerity policies, which raises doubts about her staying in power next year. The build in EUR pressure stems from the uncertainty over how much contagion Greece’s exit from the euro-zone would cause and how much damage it would do to the “cohesion of the euro system as a whole.” Various Central Bank comments that a Greek exit “can be managed and is not necessarily fatal or attractive” already indicates the risk of euro-zone fragmentation. This explicit rhetoric about a possible Greek withdrawal has investors fearful.

The PBoC lowered their RRR by-50bps to +20% over the weekend. This will allow authorities to release approximately +CNY500b of liquidity into the banking system and “help smooth liquidity imbalances.” Analysts are not ruling out any further cuts this year as China shift to supporting growth rather than boosting it. Guilty by association has the antipodean currencies currently struggling outright as weaker than expected Chinese data of late has added to this market unease.

The market will be watching any development at today’s Eurogroup meeting of euro-zone finance ministers. Public comments on Greece seem unlikely until they have formed a new government. However, France and Spain are expected to be on the agenda, as well as a broader economic outlook for the euro-zone. Analysts believe that any discussion of Spanish budget objectives will have the “risk markets reacting somewhat favorably to any indications of additional forbearance on budget targets.”  Spain is very much under the microscope. No one can pretend to know whether Spain is illiquid or insolvent without gauging the size of the “black hole” that is the country’s banking sector.

Euro data out this week will confirm the regions recessionary conditions of Q1. Growth is expected to contract significantly in Italy, Greece, and Portugal, and even Germany is likely to print small negative numbers. All of this should meet the markets criteria for a ‘technical recession.’ This will only reinforce investors expectations for ECB easing measures, which obviously will not be a EUR supporter. From a technical perspective, the 10 and 30-day moving averages are negatively aligned, reinforcing the overall bearishness of the market. Expect some analysts to shift three month EUR expectations further to the left. For the intraday investor will look to reestablish short EUR positions higher up and is eying 1.28 as the first support buying opportunity.

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Aussie Takes it on the Chin

Fridays surprise job print has certainly caught some dollar bulls flatfooted. Now, there should be very little holding the loonie back apart from the technicals. The hourly RSI is very low, with USD/CAD wading in oversold territory. Despite commodities favoring lower prices, any dollar rallies will be seen as good opportunity to own CAD. However, this currency will not fly too far from current levels until there is a market reason to either break dollar support below or Euro event risk requires more dollar acquisition. It back to a loonie contained range trade!

Below are some other highlights of the week:

Americas

• CAD: Canadian building permits rose unexpectedly in March, rising +4.7% to +C$6.83b, driven by planned construction of government and office buildings. The market had been calling for a -1.8% decline. Residential permits fell -1.3% and suggest that the pace of home building may slow in coming months.
• CAD: Canadian housing starts came in well ahead of expectations last month (+14% to +245k). It marks the fastest rate of home building in four-years.
• USD: US wholesale inventories rose less than expected in March (+0.3% to +$480B) held back by the biggest drop in petroleum stocks (-5.9%-retracing the last two months decline) in two-years.
• CAD: Canada’s trade surplus was less than expected in March (+C$351m from a downwardly revised +C$273m in February). The decline in shipment of crude drove overall exports down (-0.4%), only to be outpaced by the biggest decline in imports in 12-months (-0.6%).
• USD: Initial US jobless claims fell-1k, beating expectations of +5k to sit at +367k, w/w. The total number of claims fell by-175k to +6.4m. Analyst’s note this leaves jobs growth somewhere between “escape velocity and stall speed.”
• USD: The US trade deficit widened in March (-$51.83b, up +14.1%), with a “wave of Chinese goods and oil imports (+$238.6b) proving enough to overwhelm record high exports (+$186.7b). It is worth noting that the trade deficit with China continues to expand (+11.9% to +$21.7b).
• USD: JP Morgan announced that is saddled with a $2b trading loss in Q1 and has hinted that more losses could be revealed in Q2. After four years little has changed!
• CAD: Canada posted a second consecutive month of strong employment gains (+58.2). Full-time posted +43.9k, while part-time recorded +14.3k. The average hourly wage increased +2.3%, y/y. The participation rate also edged higher to +66.8% from +66.6% allowing the unemployment rate to tick up to +7.3%.
• USD: US wholesale prices fell slightly (-0.2%) last month as energy costs declined pushing the measure of inflation to its lowest level in two and a half years. Ex-food and energy, it rose +0.2% and y/y, costs were up +2.7%. Worth noting that wholesale gas prices were down -1.7% month-over-month.

EUROPEAN Week in FX

ASIA Week in FX