The Euro rose over the past two days on speculation that the ECB would implement bond yield caps on the debts of Eurozone sovereign members. If implemented, this would require the ECB to artificially determine the limit at what each sovereign debt should trade at and be willing to purchase an unlimited amount of sovereign debt. To me, the idea seems quite ridiculous, and it provided an opportunity for me to short a December Euro futures contract, ECZ12, at $1.2500.
The backdrop for Europe is that of weaker countries dragging down stronger ones. Greece, Italy, and Spain all have economic and financial woes. Meanwhile, the breadwinner, Germany, has started to have economic slowdowns of its own. With regard to finances and money printing, Germany will only act under political conditionality.
This is supported by ECB President Mario Draghi’s comment:
It is within our mandate to do whatever is within our power to preserve the euro as a stable currency.
As well as Angela Merkel’s:
The president of the European Central Bank, what he said is something that we repeated time and again, actually since the beginning of the Greek difficulties more than two years ago, that we feel committed to do everything we can in order to maintain the common currency. So European Central Bank although it is of course independent is completely in line with what we’ve said all along and the results of the meeting of the central bank and their decisions, and also actually shows that the European Central Bank thinks that political action as regard conditionality is simply a pre-condition for a positive development in the euro area and this being shaped in a positive way.
Germany is in a bind. It will not endorse printing Euros unless it has some political control, where “liability and control belong together.” Meanwhile, Germany must continue to bluff to its trading partners because absent the union, it risks an inability to export.
My only risk here is that the Euro moves meaningfully higher with structural reform in Europe (highly unlikely) or accommodative monetary policy in the US without accommodative monetary policy in Europe (possible but unlikely). In the short-term, the European Union could call another summit (we’ve had something like twenty now) and have some type of resolution, but no sovereign wants to give away rights to another. In my mind, the Euro faces a slow, steady decline.