EUR/USD rose as high as 1.0201 today but has given back nearly half the gain, falling to 1.0145. That's tracked the general pattern of the US dollar and broad risk appetite but the inability of the euro to sustain a rally highlights a big risk: Russia cutting off European natural gas supplies.
Planned maintenance on Nord Stream I is set to end on Friday but there are growing signs that the gas won't be flowing, at least not a full speed.
For one, German power operators have now asked for a second examination on keeping nuclear power plants open beyond year-end. Earlier this year a 'final' decision was taken to shut them down but the prospect of blackouts has changed the calculus. You can't help but wonder if they know something we don't.
Secondly, Russian envoy Mikhail Ulyanov tweeted this on the weekend, suggesting a cutoff is coming.
Thirdly, German and other officials have indicated that the turbine held up in Canada by sanctions is not essential to Nord Stream I and is being used as a pretext.
Add it all up and the market is pondering what a cutoff in natural gas supplies will look like. As it stands now, TTF gas is trading at €159/MWh and power is at record prices. Halting gas would certainly lead to a European recession, but what about the rest of the world?
We've never seen a situation like this but there's a scenario where demand destruction in Europe could be so high that it will put downward pressure on prices globally -- particularly for raw materials ex-energy. It would certainly mean fewer rate hikes for the ECB but could also mean the same elsewhere. Moreover, the hit to global corporate profits would hurt large multi-nationals and halt investment in Europe.
The second-order effects are even harder to predict. Europe would respond with subsidies but that would risk a debt crisis down the road and it could also be mixed with a political crisis. There are 'upside' risks too if it brings about an end to the Ukraine war and Europe pressuring Ukraine to give up lost ground and agree to a ceasefire.
