That’s the question that everyone is asking.
The answer is yes.
Every crisis has an ebb and flow. Remember how the sub-prime crisis became the housing crisis which became the US financial crisis and then the global financial crisis?
It’s time to step back and look at the narrative of the European crisis. Obviously it was born of the global financial crisis. Undoubtedly there is/was a sovereign crisis in the PIIGS countries.
Three months ago the fear was that it would blossom into a full-scale banking crisis and a core European sovereign crisis — perhaps another global financial crisis.
I would argue that those risks are gone, or greatly diminished. The catalyst was the LTRO which provided an enormous cushion to banks. In turn, they have started to buy sovereign bonds. Take a look at Italian yields, down 10 of the past 12 days.
The next LTRO is Feb 29 and there is talk of a €1 trillion or evem €3 trillion take up. We also had some tentative signs of improved growth in the European PMIs.
What does it mean for FX? The euro squeeze has room to run to 1.34. The path is still lower, however, with weak European growth and ECB liquidity driving EUR/USD to 1.20. The more straightforward trades are commodity FX, which are headed higher, especially against the yen and CHF.
