Rumors Fuel Euro Short Squeeze

Given the sharp recovery in the foreign currencies in the North American morning, it is hardly surprising that there are numerous rumors seeking to explain what happened.

Although no dealers are reporting actual intervention, there is talk that the pace of the euro's decline has become more salient for policy makers. There is talk that the officials are preparing for intervention.

However this likely reflects nervousness in the market with large short euro positions and the risk-reversals showing a very one way market. Officials do not need to prepare to intervene. They can just do it. And all the talk about it would seem to steal its potential thunder--element of surprise.

The real intervention appears to be from Swiss officials. Preliminary SNB reserve figures suggest that it sold nearly 30 bln francs last month and estimates of its intervention today alone are running nearly half of that.

The other notable speculation is that Greece could be forced out of the EU. As there is no mechanism for this, we are dubious about the veracity. There is unlikely to be much of a consensus for this. Spain, Portugal and Ireland seem unlikely to support such a move as they same mechanism could be used against them at some point.

It is not clear that dropping out of EMU would help the remaining members very much or Greece for that matter. To re-introduce a currency for the sole purpose of debasing it is a recipe for disaster. Any competitive gain Greece may achieve through a devaluation would likely be quickly lost to inflation. Greece would likely have significantly higher interest rates and a deeper economic contraction. Within the euro zone, the debt/deficit dynamics would not go away. A Greek exit may intensify the pressure on some of the larger weak credits in monetary union, like Spain and Italy.

The euro's short squeeze is likely to run out of steam shortly, especially if this analysis is correct and there is no EMU intervention on the euro and if Greece is not about to leave the union. Only a move through yesterday's high near $1.2444 would suggest another leg up in the long over-due correction.
Rumors Fuel Euro Short Squeeze Rumors Fuel Euro Short Squeeze Reviewed by Marc Chandler on May 19, 2010 Rating: 5
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