Judging by the rally that followed the introduction of the LTRO, about five or six weeks, I’d hazard to guess.
If the ECB begins to buy bonds (whether for their account or for the account of the EFSF), or take some other novel measures which we’ve yet to identify, we should be good for a rally which lasts a few weeks. Odds of an immediate return to the downside are pretty remote unless the ECB completely whiffs after raising the stakes enormously this week. That is a low-probability event, in my view.
Nothing concentrates the minds of politicians like crisis, and having Spain and Italy teetering on the edge of oblivion is the worst case scenario euro-skeptics have long feared. The time is now for the euro zone to get its act together, or they fail spectacularly.
My guess is by the end of the summer we will know whether the euro zone has turned the corner, in terms of political and financial commitment, or it will be more of the same stumbling from crisis to crisis as we’ve seen over the last three years.
If they stay in “stumble” mode, the downside for the euro is inevitable. If they rally around fiscal union, the euro should rise for a time before the price tag becomes clear, which should see the euro weaken over the medium-term.
