Let’s suppose, for the sake of argument, that the German constitutional court allows the ESM to go forward with minimal conditions. Let’s assume that the Dutch election produces a Liberal-led government with PM Rutte returned to power. Let’s also assume that the Fed announces an open-ened QE3 policy that allows them to adjust bond purchases on the fly, buying more when the economic data trends weak and less (or none) when the data improves.
What would the impact on currencies be?
My best guess is you would see an immediate knee-jerk reaction to sell dollars across the board, followed by a gradual recovery. That’s the way QE2 played out and there are still many uncertainties over whether Spain will ask for a bailout until its back is against the proverbial wall and how aggressive the ECB will be in its goal of narrowing spreads and lowering borrowing costs (oh, and transmitting monetary policy…).
Next week has the potential to be a classic case of buy-the-rumor, sell-the-news.
