Forex Markets Show Encouraging Signs?

By: Dr. Mike Campbell

Despite the fact that another ratings agency has downgraded Greek bonds to junk status, the Euro is having a bit of a rally and all of the world’s major exchanges have ended higher.

On Monday, Moody’s dropped their assessment of the risk associated with Greek bond issues by four points to junk status. This does not mean that Greek bonds are worthless; far from it. It indicates that the ratings agency believes that there is a higher risk of Greek defaulting on its debt than other countries that enjoy better ratings. A kinder, more appropriate term for a junk bond is a “high yield bond” which reflects the fact that higher risk investments offer better returns in order to encourage investors to buy them.

The Euro has rallied against the Dollar, coming off a four year low of 1.1878 to the Dollar last week to close at $1.2332 at the end of yesterday’s trading session. The popular explanation for this is that markets are regaining confidence in the single European currency and the European Union’s measures to manage the sovereign debt crisis within the Eurozone. A more cynical, and possibly more accurate, reading of the situation is that currency speculators have pushed the Euro as low as it is likely to go in the absence of a major disaster and are now going to take their profits from the short selling positions that they took up. If this analysis is correct, then the next target for currency speculation is the Yen which is probably seriously over-valued in view of the economic situation in Japan and its own debt mountain.

Markets and the price of oil have also moved higher, recovering part of the losses seen in recent weeks as confidence took flight (again) from global markets. It will be interesting to see how things stand when I review the week’s stock and currency movements on Monday.