Euro/USD Squeezed Above $1.30

On Monday, the EUR/USD pair continued to rally, breaking above the $1.30 level for the first time in weeks. The euro moved higher, possibly on the speculation that the Greek crisis was coming closer to a resolution. Talks have been ongoing between Greece and its creditors to come a deal that would definitively restructure Greece's debt. Months ago, a plan had been floated that would allow Greece to default "voluntarily." The plan would see Greece's creditors take a deal of 50 cents on the euro—cutting Greece's debts in half. Yet, even that appeared not to be enough, as new speculation arose that the deal would be a cut of 70%. With Greece's economy suffering under a combination of strikes and the broader global recession, the ability to shoulder a tremendous amount of debt seems unlikely. Still, while some of Greece's creditors have a vested interest in seeing the country succeed, others—such as private hedge funds—do not have direct ties. In fact, a voluntary debt restructuring would be opposed to the interests of many of these creditors, who would find that any credit default swap contracts they may have purchased to hedge their bets would be worthless. CDS contracts are only triggered in the event of an official default, and accepting the given deal would not trigger the payout. This would result in a loss for these private creditors, rather than getting their money from the payout of the CDS. Given how heavily the euro had been shorted, the move on Monday may have been assumed to be a short covering rally, rather than a major fundamental shift. The deals between Greece and its creditors may be winding down, but nothing has been definitely settled at this point. The US dollar index continued to trade lower, following a trend that has been ongoing for roughly a week. The dollar index broke below $80, moving closer to $79.70. With a tremendous amount of short interest remaining in the euro, the currency could continue rallying from here—especially if the possibility of positive news scares euro bears into backing off on their bets. On the other hand, the potential ramifications for a disorderly Greek default could be tremendous. In that event, traders could see the dollar rapidly bounce back and rally higher, as investors seek the safety of cash in the face of continued global uncertainty. As CDS contracts are unregulated, it is unknown who owns these instruments and to what extent. Further, as financial institutions underwrite these instruments, the potential payout could be crippling, especially given the fragile state of the broader European financial system. Traders looking to be active in the EUR/USD pair should keep their attention focused on Greece—as they have for nearly a year.