Trading the Greek Debt Deal

Early Thursday, the US dollar gained marginally against the euro, with the EUR/USD pair dropping about 0.40% in early trading. Comments from Jean-Claude Juncker—the President of the Eurozone—may have been the catalyst that sent the euro trading lower. Juncker characterized the ongoing discussions with regards to Greece's debt as being "ultra-difficult." Further, Juncker called the measures from the January 30th summit "largely insufficient." Interestingly, he stated that it was not necessary to appoint a commissioner to take on the role of policing Greece's budget. Over the past year, the EUR/USD pair trade has been dominated by news from Europe. Although the pair is trading fairly close to where it was roughly 12 months ago, it has seen somewhat of a rollercoaster ride, with highs near $1.43 and lows around $1.25. When speculation has mounted that the Eurozone could experience a major crisis, the euro has sold off. In a worst-case scenario, the euro currency itself could cease to exist, or come under tremendous volatility in the wake of a breakup of the currency block. Within the last few weeks, the pair has largely appeared to move on headlines about the ongoing discussions Greece is having with its creditors. Although Euro leaders promised to prevent Greece from defaulting last year, that position has been largely been ceded, and the prospect of a Greek default now appears to be a given. A disorderly default could be avoided if

to some form of set deal with its creditors. Last October, plans were unveiled that would see Greece getting a 50% haircut on its debts. Under this scenario, creditors would accept the losses on a "voluntary" basis. This would prevent credit default swap contracts from being paid out. This scenario would be ideal for the Eurozone as a whole, as the payment of CDS contracts could be tremendous stress on financial institutions that could be on the hook for untold amounts. Yet, the creditors themselves would be left holding the bag. In the event that a deal is reached, the short-term move may be a rally higher in the euro. The euro has rallied in recent weeks, but is still a heavily shorted currency. Euro bears may be forced to cover their positions if the situation appears to be resolved. This could also send financials—particularly European financials trading to new heights. On the other hand, if no deal is reached and Greece defaults in a disorderly way, the resulting chaos could see a quick downward move in the euro and a selloff in the broader markets. Although the concept of contagion appears to have faded (as opposed to last summer when it appeared to be all the rage) it could quickly rear its head as speculators move to take down the bonds of other indebted Eurozone members. At any rate, traders should keep their eyes on the headlines

. While short updates may amount to nothing more than market noise, a large resolution—or disorderly default—could come to be the major inflection point for the markets in the first half of the year.