The euro jumped 100 pips in a flash on the release of the EFSF guideline report. The move is nonsense and has retraced completely. EUR/USD has fallen as low as 1.3656 which is 120 pips below our trade entry point. Let’s take a closer look at the news.
There is nothing remarkable about the text of the document. It merely gives the EFSF power to purchase bonds in the secondary market, something that was widely expected. It also allows for credit lines to governments for the specific purpose of bank recapitalization but only as a last resort. The rules are effective immediately.
Intervention should be done “on the basis of ECB analysis and following a decision by mutual agreement from member states” and the condition for access requires “continued compliance with appropriate policy reforms” dictated by euro area finance ministers.
This draft may be all that’s accomplished this weekend. The latest reports suggest another round of meetings has been set-up for next week because of disagreements over leveraging the EFSF and the size of the Greek haircut.
“There will be no agreements,” said one senior German official. “This will now happen Wednesday at the earliest.”
The weekend will flop but the stone has been kicked down the road. There is a chance that 1.3650 breaks as headlines disappoint. I’m tempted to book profits if we see a large EUR selloff before the weekend.
Negotiations are divided on the French idea of turning the EFSF into a bank. Germany is adamantly opposed but may be growing isolated. If Sarkozy is able to force the idea forward, it would be the worst-case realistic scenario for EUR shorts.
In other news, Germany cut its growth forecast for next year down to a paltry 1%. It’s hard to imagine any other economies in the region doing any better.