This week has finally seen some sort of resolution to the long standing Greek problem, the major highlights for me being the continuous contradictory statements from politicians across Europe that went on for months. The funniest one came from President Sarkozy a few weeks ago when he stated that Europe was presenting a clear statement on Greece . It couldn’t have been more unclear if he’d actually said that in Greek! However, the reality for the Euro, the ECB and political unity is that this whole debacle has been anything but amusing. The paradoxes between trying to create monetary and economic union across such a diverse range of cultures and infrastructures has been laid painfully wide open, as the eventual resolution was met with a decidedly underwhelming response in terms of seeing support for the currency.
It is not difficult to see why. The political fudge has seen Europe go cap in hand to the IMF due to domestic political considerations and must leave the ECB and Trichet (whatever they may say publicly) scratching their heads in despair as one of cornerstones of making the Euro a reserve currency has been removed. To place into context it is impossible to image a time where the United States or the Federal Reserve went to the IMF for help to deal with California’s debts.
In reality the markets have won. The continual pressure on Credit Default Swaps forced the authorities hand to create a solution, however unsavoury. Having succeeded once my view it is only a matter of time before the market’s attention moves elsewhere as Europe weakest nations become the next in the firing line.
Much has been said about the large short position in the Euro in the futures market and that this is a reason to see a short squeeze. This is not something I think is relevant at all, as the rules of engagement in markets are redefined. This can be seen when looking at the surges in open interest in many futures markets in recent years. More importantly for FX, futures are just a part of the overall market participation and therefore its positioning has less influence. Whilst the Eurodollar remains below 1.3594, the historical breakdown of last week remains intact, whilst the 6 weeks sideways pattern also implies that that a sustained trend should develop.
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