The NY session price action whet the appetite of those seeking volatility. The main driver was the headlines out of the Eurozone with regard to (what else) the debt problems in Greece. EUR/USD had been under intense pressure all session as the risk trade was rapidly unwinding. As the pair traded near 1.3700, however, headlines began to hit the tapes that the EU was prepared to bail the beleaguered nation out. These came from multiple officials and sources and thus were taken at face value, sending the pair to the 1.3840 session highs in the blink of an eye. Shortly after the impressive move, though, a German official came out and stated that the bailout of Greece had been mere conjecture and that the so-called bailout rumor had no validity. This instantly saw Euro come off the boil and make a break towards the 1.3750 area. That was not the end of it. Late in the session a news story emerged that Germany would indeed look to extend loan guarantees to troubled Eurozone nations and this eventually saw the currency settle closer to the 1.3800 mark. For all of the complaining with regards to currency volatility, EU members today did their best to elicit a whippy market.
We remain cautious on the Euro despite Germany’s supposed willingness to bailout the periphery. Doing this would hardly eliminate the risk of long-term default and merely shift part of that risk onto the German balance sheet. We wonder aloud how the German taxpayer will feel about bailing out countries whose irresponsible spendthrift behavior led to the crisis in the first place (Spain’s consumer debt had been growing at 20% per year since the Euro’s inception!). While the bailout would undoubtedly be a short-term fix, the longer-term solution is a more painful one for the common currency. Remember that the only way to truly eliminate debt that has no chance of being paid down in the long-term is to print the debt away via creation of more paper currency. One does not need to be an economist to realize that this would be the ultimate EUR negative.
