How Gullible Are the Markets? EUR/USD Says Very Much So

On Friday, the EUR/USD pair rallied as comments from German Chancellor Angela Merkel and French President Nicolas Sarkozy indicated that a new bailout package for Greece worth nearly 150 billion euros would come sometime in July, Reuters reported. The markets moved higher on the news. In the U.S., the Dow Jones jumped nearly 1%, while Greece's Athens Composite Index rallied nearly 5%. The EUR/USD bounced back slightly. The pair sustained heavy losses on Thursday when a report indicated that Germany planned to delay a new Greek bailout until September. At present, the Greek government only has the funding to stay solvent for approximately one more month. Athens has been relying on aide from the International Monetary Fund to stay afloat. According to The Guardian, John Lipsky—the acting director of the IMF—threatened to pull the IMF's support of Greece (and thereby trigger a sovereign default) unless Germany was willing to pledge its full support. Is the rally in the euro and the markets justified? Alan Greenspan does not think so. On Thursday night, the former Federal Reserve Chairman stated that it was "almost certain" that Greece would default, according to Bloomberg. Further, the new plan hinted at by Merkel and Sarkozy was based on a few assumptions. The plan will require existing bond holders to be willing to roll over their debts. While it is possible that some bond holders would be willing to oblige to avoid losing their investments, others may prefer not to continue propping the troubled nation up. Additionally, the plan will look to private investors to participate on a "voluntary basis," The Wall Street Journal reports. Some private institutions certainly could lose out in a Greek default, and thereby may be willing to lend aide, but will there be enough interest in the private markets? At the present time, the new agreement to bailout the Greeks appears to be questionable at best. Investors should be wary before moving back into the euro. Action Items Bullish: Traders who believe that Merkel and Sarkozy are sincere, and that Greece will be bailed out successfully, might want to consider the following trades:

• Buy Wisdom Tree Dreyfus Euro ETF EU in a long play on the euro. EU is up Friday, and may rally further if the euro appreciates.
• Buy Pro Shares Ultra S&P 500 SSO in a long play on U.S. equities. If problems subside in the Eurozone, that might be good for the broader global economy, including U.S. markets.

Bearish: Traders who believe that Greece will inevitably default, either completely or partially, may consider taking positions in the following:

• Power Shares DB US Dollar Bullish Index UUP is a long play on the dollar. The dollar index rallied sharply on Thursday when Germany's desire to push back the bailout to September surfaced. The U.S. dollar might be seen as a safe-haven amid European turmoil.
• SPDR Gold Trust GLD in a long play on gold. The yellow metal may rally if the euro begins to tank.

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