Two stories from Reuters over the weekend; the first was a call from the Spanish PM for a new fiscal authority and the second was the escalation in talk of fiscal union in the near future. EZ officials are obviously still working hard on potential solutions to their debt woes.
The whole idea of financial markets is that the participants push, shove and cajole towards an optimum outcome. If the EUR/USD is too high or at unsustainable levels, then the market will keep selling it until it gets the pair to a neutral level. That’s the theory at least, but it presumes that we live in a perfect world, which we do not.
The market is extremely short of the EUR and is likely to stay that way until it gets the outcomes it wants ie lots of profit! At this moment in time, the market does not want any EUR rescue missions to succeed, it wants them to fail miserably and the EUR/USD to fall towards 1.10 or even lower. There have been plenty of occasions where the speculative market has been correct (think GBP devaluation in 1992) and there have been other times when something has happened to derail the profit train. We have no way on knowing what’s going to happen this time around.
My best guess is that we have not yet seen the bottom for the EUR, but when it does turn we will see one almighty face-ripping short-covering rally.
