Euro Soars As EU/IMF Create Near $1 Trillion Rescue Deal

EU officials meeting in Brussels over the weekend agreed to a massive rescue package totaling near 1 trillion dollars that would guarantee sovereign debt within the Eurozone. The deal includes an array of measures including $560 billion in new loans, $76 Billion under an existing facility as well as additional credit for the IMF of up to $321 Billion.

To further buttress the moves of the fiscal authorities, monetary officials from the Fed, the ECB, the BOE, the BOC and the SNB all agreed to reopen currency swap lines in order to ease liquidity in the money market and the interbank markets.

The concerted effort by the EU finance ministers and G-7 monetary authorities was a clear sign to the markets that the union stood ready to rebuff the speculative runs at the credit of Southern European economies that have threatened the financial stability of the Eurozone and the prospects of the euro itself.

However many analysts continued to express skepticism as to whether the deal which creates a special purpose vehicle with a three year duration and which will be dependent on “national constitutional arrangements” will be robust enough to withstand the possible stresses to come. Several key Eurozone members are facing massive rollover risk in the credit markets with Italy having 600 Billion euros come due over the next two years while Spain will have to refinance 220 Billion euros and Portugal will need to raise more than 40 billion euros over the same time frame.

At the very minimum today’s action stabilized the beleaguered currency for the time being with EUR/USD recovering to an early morning high of 1.2980. The short euro trade has become incredibly crowded over the past week and today’s price action punished the late euro shorts as they scrambled for cover in the wake of the EU announcement. However, 1.3000 remains a key resistance level for the pair and so far the unit has been unable to mount a rally through that figure.

More importantly today’s opening created a gap and given the recent price history in the currency market that gap will likely be filled over the next several days. The key test of euro strength may come once that price action occurs. If the euro can hold the panic lows set late last week, the unit could then mount a more sustainable recovery rally as confidence slowly returns to the market. Long term however, the direction of the euro remains very much an open question given the highly dilutive measures taken today.