Dollar Sinks as Greece Pre-Election Polls Spark Risk Appetite Recovery

DailyFX   |  May 28 2012 3:45 EDT

The US Dollar sank to start the trading week as polls showed a pro-bailout party was leading in Greek pre-election polling, sparking a rebound in risk appetite.

Talking Points

• US Dollar Sinks as Greece Polls Show Pro-Bailout ND Party Leading
• BOJ Minutes Talk Down Outlook for Further Stimulus Expansion
• Market Closures in US, Germany Could Make for Erratic Price Action

The US Dollar (ticker: USDollar) traded sharply lower against all of its major counterparts, sliding as much as 0.6 percent on average, as risk appetite recovered to start the trading week and dented demand for the go-to haven currency. The MSCI Asia Pacific regional benchmark stock index added 0.7 percent and sentiment-geared commodities including crude oil and copper notched formidable gains.

The upswing in sentiment followed reports that Greece’s pro-austerity New Democracy (ND) party was leading in opinion polls ahead of the June 17 general election, edging out anti-bailout Syriza. The news alleviated fears that Athens’ next administration will renege on its EU/IMF bailout commitments, which would presumably precede a much-feared exit from the Eurozone. A relatively hawkish set of minutes from April’s Bank of Japan policy meeting failed to derail sentiment. BOJ members said they did not intend to imply that inflation lower than the target 1 percent implies automatic increases in stimulus.

On balance, the news out of Greece appears most significant as a trigger activating lager forces than a market mover in its own right. Indeed, ND was the best-performing party in the last round of elections as well but failed to get enough votes to build a ruling coalition, setting off the precarious situation the markets find themselves in at present. Put simply, an ND victory in and of itself does not assure stability or the implementation of the bailout terms.

As we argued previously, a recovery in risk appetite appeared imminent late last week as the supply of near-term negativity that could conceivably unhinge markets after three weeks of intense selling began to run dry, opening the door for profit-taking to spark a correction. The EU leaders’ summit ended withpolicymakers putting Greece’s fate in its own hands, meaning little is likely to change until the elections. Meanwhile, the latest batch of dismal PMI readings from China and the Eurozone reinforced the threat that both economies post to global growth but offered nothing thematically unfamiliar for investors.

Looking ahead, a quiet day is ahead with only one bit of scheduled event risk on tap in Europe and financial markets closed in Germany and the US. On one hand, this suggests that little stands to derail existing momentum, hinting the greenback is likely to remain under pressure in the coming hours. On the other, it means liquidity conditions are likely to be especially thin, making for potentially choppy price action and amplifying the possibility of sharp seesaw volatility.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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