For the third day in a row, the euro has bounced against the dollar, leading many traders to wonder whether the single currency has finally hit a bottom. When the EU/IMF rescue package was first revealed, euro traders ignored the bold attempt by policymakers to stabilize the markets because of the abundance of unanswered questions (listed below). About half of the questions have now been answered, albeit with minimal details which is why we have to respect the recovery in the euro. The ECB has released the initial details on the scope of their bond purchases and their sterilization plans while the German Parliament has finally approved their portion of the EU rescue plan. Greece still needs to decide whether they will accept the terms but for the most part, the short term questions have been answered. The main reason why there was Euro breakup speculation earlier this month was because France threatened to leave the euro if Germany did not approve the plan and now they have.
Yet the long term concerns about growth remain and that is why global equities have found little relief. This morning's Eurozone economic reports provide the first evidence that the turmoil in the markets is starting to take its toll on German businesses. As the austerity plans are implemented, the impact on growth will become even more significant. Yes, the weak euro is stimulative, but it may not be enough to offset weaker domestic demand. In the short term, the key will be equities. If the 10,000 level in the Dow holds, it may stabilize risk. If it doesn’t and we see another 200 point decline, the EUR/USD may find itself back below 1.25
Initial Questions from EU/IMF plan:
1. What will be the exact mechanics behind the Special Purpose Vehicle that will provide the EU440bn that is guaranteed by member states? What are the rules and terms
2. Will the SPV need to be approved by individual nations / Parliaments and if so, when will this happen?
3. Will Greece accept these terms? Will they amend it?
4. Can all countries afford to contribute to the plan and will the countries seeking aid be able to handle the tough conditions that may accompany the loans ?
5. What is the size and scope of the ECB's bond purchases?
EUR/USD Rally Reduces Chance of ECB Intervention
Furthermore, the ECB is not likely behind the recent rally in the euro, which means that the short covering has fueled the recent move. The recovery in the EUR/USD will reduce pressure on the ECB to intervene in the euro because someone else has done their job for them. Neither central bank has admitted to intervention which is characteristic of the SNB but not the ECB. Furthermore, if the ECB did not intervene in its currency, why would they admit it? Any admission would lead to further weakness in the euro, more volatility in the foreign exchange market and additional speculation about when the ECB would finally intervene. By remaining quiet, they leave the market guessing that they may have intervened, which for the time being has created a bottom in the EUR/USD.If the ECB intervened, they would be far more vocal because the point is to shock the market and get traders to stop selling euros. The SNB on the other hand has been silently aggressive for most of the year.
