• Markets:

    -The short-squeeze in EUR/USD that started with Nowotny’s comments on Wednesday accelerated yesterday after ECB President Draghi at a conference in London stated that ”within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

    -EUR/USD spiked above 1.23 and EUR/JPY above 96. We have emphasised the risk of a euro short squeeze in recent FX Hot Picks and on Wednesday flagged the idea of buying a 2W 1.21-1.23.1.25 butterfly. The question now: is there more value in these trades and how far is the euro correction likely to run?

    -The short-squeeze following the EU summit in late June allowed for about a 2.5 big figure spike in EUR/USD.
    This corresponds fairly well with the rise from Tuesday’s 1.2043 low. Spot momentum is not yet looking as stretched, however, as indicated by the RSI(14) which peaked above 54 when the EU summit rebound ended, but currently trades at 47. This indicates further potential. However, it will all depend on the ECB.

    -If we have learned one thing from verbal interventions it is that the market impact will only prove sustainable if backed by action. Considering Mr Draghi’s comments a restart of SMP (or EFSF/ESM) buying appears the most likely near-term response and is also one of the few euro positive tools. When discussing short-term challenges Mr. Draghi stated that the two big LTRO’s had taken care of the risk aversion factor, that the ECB can do little about counterparty recess, but that it can act on excess sovereign funding costs. More specifically Mr. Draghi stated that “to the extent that these premia do not have to do with factors inherent to my counterparty - they come into our mandate” and “to the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate.”

    -To answer the question if there is value left in positioning for EUR/USD upside it depends on how much digital (or event) risk one is willing to accept. A 2W 1.23-1.25-1.27 can be entered at an initial cost of about half a big figure and should prove valuable if the ECB delivers – but this trade has already gone far.