Part of the earlier rally in EUR/USD was short-covering on hopes/fears that Greece will be bailed out by the IMF over the weekend.
Let assume, for the sake of argument, the IMF alone comes in to aid Greece. How would the market react?
I think today’s price action is instructive. When unprecedented action takes place, markets often square positions and ask questions later. An IMF bailout of a member of the Euro zone is unprecedented and may be viewed by some as resolution to a problem.
A near-term rebound could be seen; a classic relief rally. To my mind, the macro impact would be decidedly negative for the euro zone as calling in an outside entity to fix a “domestic” problem would affirm the market’s concern that the euro zone in its present form is ungovernable. A knee jerk rally might last a day or tow, but ultimately the EUR would be gravely wounded by an IMF intervention.
Might not be a bad weekend to be long options…
