Nein Euro solution fears ahead of ECB

Similar price action but a different day, a day that is hopefully going to shape a ‘new’ Euro. Markets have been sucking wind ahead of the ECB and the beginning of the Eurogroup heads of state meeting. Yesterday’s price action blip can be blamed on toxic rumor mongering and on some German officials downplaying the likelihood of a successful conclusion to the summit. An official suggested that Germany wants a clear commitment to Treaty change from all Euro area members, something some countries seem unwilling to make. Additionally, Germany has made clear it is against allowing the EFSF and ESM to run concurrently as a means to raise the capacity of the Euro area to intervene in bond markets. With the lack of a ‘bazooka’ this weekend, how much is that going to affect the market? Surely getting all Euro members pointing in the same direction is enough for a first round victory?

Today, in a few hours, the market is looking for a-25bp cut, possibly-50bp, by Draghi and company. The repo rate will be expected to go hand in hand and be cut by a further-25bp. It seems as we get closer to the decision and coupled with yesterday’s Medley rumors, market participants’ expectations have-50bp in the crosshairs, while analysts are resigned to-25. The add ons? Maybe some adjustments to their long term repo-operations and an announcement of loosening of collateral requirements. It’s too early for the board to “offer definitive guidance on its plans for sovereign bond purchases”.

How will this effect the EUR? There will be positive and negative affects on the exchange rate. A loosening monetary policy generally undermines a currency value. It should be no different in this situation. The market will be expecting some EUR slippage outright and on the crosses, however, the market is already very short. On the flip side, an aggressive ECB stance could be perceived as positive for the EUR. Any policy action that relieves perceptions of “systemic stress” and the continued viability of EMU could trigger some of the EUR shorts to pare their position ahead of the summit conclusion. In theory, a EUR bounce should be snuffed out by the lack of aggressive periphery bond purchase policy. Buying of periphery bonds ‘en masse’ is capable of restoring confidence in peripheral financing market, until that’s achieved, the EUR has more to lose than gain from rate cuts in the current climate.

If one has no faith in the fundamental side of things then perhaps the technicals can offer a clearer picture. The EUR has understandably settled down in a narrow trading range, spending the week between 1.3390 and 1.3550 and narrowing further ahead of the Euro summit. At the moment, it does not seem that the range wants to be threatened until the market gets a better idea on what Euro policy makers have in store.

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Will the EUR wait for the Summit?

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