Aussie is dropping in forex trading as the Down Under currency suffers from concerns about the state of the global economy. Even though the euro is seeing a bit of a recovery from earlier problems, the Aussie is not seeing that optimism.

Instead, the Australian dollar is down in currency, lower as concerns about Greece threaten global economic stability, and reduce risk appetite. As a high beta currency, Aussie is very affected by concerns in Europe, and their effects on markets.

Additionally, Aussie is not getting much help from gold prices. The relative strength seen by the US dollar is depressing gold prices, and sending them down. Right now, gold is below $1,550 an ounce, and it appears that it will continue to fall. As a commodity currency tied to gold, this news is not helping the Australian dollar very much at all. 

Greek contagion fears are rising once again as the Greek president calls for new elections in mid-June and as citizens begin withdrawing money from Greek banks.

There are concerns that bailout aid will not come in time if Greek elections are delayed until the middle of June, and there are also fears that Greeks will decide to leave the eurozone altogether. Although some think that Germany will do its best to hold the eurozone together -- including Greece -- some think that it just won't be feasible.

Euro has been struggling lately in forex trading as a result. Earlier, the euro was lower against the US dollar, but the 17-nation currency has since gained some of its lost ground. However, the euro is only modestly higher on the news that housing starts improved in the United States. Forex traders might be diverted for now, but there is a good chance the troubles in Greece, along with fears of contagion, are likely to take precedence again soon. 

Isaac Newton was a pretty smart guy. The founder of our modern understanding of physics’ 3^rd Law of Motion states: For every action, there is an equal and opposite reaction. Chances are, he didn’t intend for that Law to be the basis for the Law of Unintended Consequences. It reminds me of the popular DIRECTV commercial that says:

If you have cable and can’t find something good to watch, you get depressed. When you get depressed, you attend seminars. When you attend seminars, you feel like a winner. When you feel like a winner, you go to Vegas. When you go to Vegas, you lose everything. And when you lose everything, you sell your hair to a wig shop. Don’t sell your hair to a wig shop. Get rid of cable and upgrade to DIRECTV.

Similar to the DIRECTV commercials, there could be unintended consequences in the financial markets. According to a recent report, some economists / traders are saying the likelihood of a Greek exit (Grexit) from the European Monetary Union (EMU) is between 50% - 75%. That is an awfully high percentage to be throwing around considering the number of hoops that policymakers and citizens would need to jump through to get to that point. Consider this. There was a report done in December 2009 by the European Central Bank (ECB) that says [emphasis added]:

“a Member State’s exit from EMU, without a parallel withdrawal from the European Union (EU), would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible.”

Does that sound like a high probability scenario for a Grexit? Personally, I don’t think so, but let’s operate on the assumption that Greece is expelled from the EMU. What are the potential unintended consequences of that scenario?

Potential Scenario:

*This is all conjecture and based on estimates that may or may not prove true in the event of an actual Greek exit from the EZ.

Greece exits the Eurozone on its own accord, and issues the New Greek Drachma (NGD). There is a 4-week window where Greek citizens are instructed to exchange their euros for NGDs at their local banking establishment. Bank panic ensues as Greeks take their euros out of Greek banks and put them in the banks of EMU nations, bypassing the exchange in to NGDs. At the end of the 4 weeks, the NGD is placed on the open market for trade at 340 NGD equal to 1 EUR (the rate when the original Greek Drachma was absorbed in to the euro). The markets go crazy as everyone watches the demand for NGD plummet since no one wants to hold the toxic paper, falling all the way to 600 NGD per euro. *This figure was based on the devaluation of the Icelandic Krona in 2008.

Meanwhile, all of the debt that Greece had accumulated in euros previous to this issue is transferred to NGD at 340 NGD per euro. Assuming estimates are correct in that Greek debt equals 170% of GDP, then Greece owes approximately 398 Billion euros or 135.32 Trillion NGD. As the exchange rate plummets, it settles at 600 NGD per euro, making that original 398 Billion euros only worth about 225.5 Billion euros. Greece eliminates approximately 57% of their debt, and the European banks that are owed that money take significant losses. Greek citizens also begin taking their euros out of European banks and converting them in to NGDs at 600 NGDs per euro and depositing back in Greek banks. Greek citizens become 57% wealthier creating a wealth boom and a credit surplus among many Greek citizens and banks. Germany and France are forced to bail out their banks much like the US did in 2008, putting their own citizens on the hook via taxes and bond issuance.

Seeing the success of the Grexit for Greece, the rest of the PIIGS nations – Portugal, Italy, Ireland, and Spain – prepare to issue their own currencies and follow Greece’s successful blueprint. French and German banks lose more of the money they loaned to the PIIGS nations and require more bailouts that would then be provided ironically by Greece. Unhappy with their leadership, Germans abandon status quo and vote David Hasselhoff supreme leader of Deutschland. Don’t let David Hasselhoff become a world leader. Keep Greece in the Eurozone.

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UK pound is heading lower in forex trading on the currency market today, dropping as demand for the sterling as a European safe haven fades.

The latest GDP data out of Germany indicates that the eurozone has not fallen into recession after all. There had been many fears about the situation in the eurozone, but things have smoothed out with the latest GDP data from the eurozone's largest economy.

Euro is getting a boost as a result, and that means the sterling is headed lower. The pound has been used as a European safe haven for quite some time, and demand is dropping now that the European economy seems to be doing all right. Sterling is also lower against the US dollar and the Japanese yen today. 

After days of defeat on the forex market, the euro is finally heading higher. Thanks to the latest German GDP data, the euro is gaining in forex trading.

German GDP came in better than expected, and that is boosting the euro's performance. Euro is gaining against the US dollar, as well as other currencies.

Indeed, the euro is higher against the UK pound for the first time in days. The sterling has been seen as a European safe haven from eurozone troubles, and has been gaining recently. Now, though, with fears of a eurozone recession fading, there isn't the same demand for the pound as a safe haven.

However, there are still plenty of hurdles for the euro to overcome. Greece and Spain have yet to be sorted, and economic growth in countries besides Germany isn't very good.