Forex Trades for the Greek Elections and Wednesday's Fed Meeting

Over the coming days, two major events will dominate global markets: on Sunday, Greeks will vote in a national election. Then, next week, the Federal Reserve will hold its June meeting. Traders looking to take a position on these events may turn to the forex market to do so.

EUR/USD Traders can take a position on the outcome of the Greek election via the EUR/USD pair. Those who believe that there will be a negative outcome in Greece (a Radical Left victory) would want to short the EUR/USD, especially after the currency pair has seen recent gains. As the chart below shows, the pair is running into significant neckline support (the straight red line across the top) and is supported by the upward-sloping tend line from the lows hit at the end of May.

This technical formation is interesting in that it usually results in a breakout of prices, often to the upside. However, as this pattern is aligning with the fundamental story of the Greek elections, a wise trader would expect that the results will determine the next move. A negative outcome may send the pair lower, near $1.25 and then to $1.2450, where there are significant technical supports. Upside resistance is in the $1.2780-1.2820 range, so there is significant room for a move on either side.

Gold Some market watchers have said that a negative outcome from the Greek elections will prompt the Fed to take action next week. Traders who follow this view would be wise to buy gold as a hedge against aggressive monetary policy, and a great way to take a position would be with the XAU/EUR cross. Buying gold against the euro will allow traders to hedge dollar exposure ahead of the Fed meeting and also allow traders to grasp onto potential losses in the euro.

Looking at the above chart, support is not too strong until 1259 and then again at 1245, so those are the levels to watch on the downside. On the upside, resistance is at 1300 and then again just below 1315. For those who believe in the optimistic scenario, shorting this pair will allow traders to benefit twice: first from the expected fall in gold (diminished hopes of liquidity) and second from euro appreciation. On the other hand, those that feel a bad outcome is destined should buy this pair, as the long gold exposure is beneficial in situations of added liquidity and being short the euro will allow investors to have a bearish stance on the common currency.

Long the Spread of French 10-Year Bonds Over German 10-Year Any contagion effects of a negative outcome in the Greek elections will be felt in peripheral bonds as traders see European leaders not living up to their words (remember, it was only last summer that Merkel continuously reiterated that no nation is to leave the euro). A loss of confidence in these leaders will result in a dumping of peripheral debt, but the contagion could also move to France, the weakest of the core nations. If French finances start being called into check, French bond yields will move higher and capital flight may weaken the banks. France's two biggest banks, Societe Generale and BNP Paribas, had more assets than the GDP of France at the end of 2011. Thus, if they were to get into trouble, France would have to bail them out--thus putting serious pressure on the nation's finances.

This pressure would result in even higher bond yields and capital flight out of the banks and into German banks or even German bunds. Thus, German bond yields would fall and French yields would rise, driving the spread between them higher. As difficult as it may be to buy bunds at ultra-low yields, it may be the safest play still. By buying bunds, traders are investing in a negative real return (and potentially even negative nominal return), however they are getting an implied call option on a new German deutschmark. Consider that if the euro dissolves, each nation would revert to its own domestic currency. German bunds would then be re-denominated and paid out in this new currency, which would likely appreciate significantly against the euro (some say between 25-50%). Thus, by buying bunds and shorting French bonds, traders get exposure to the potentially negative sentiment surrounding the elections, the flight to quality and out of risky assets, and a call option on a new, stronger German currency.