means for the euro
- If Greece taps the IMFs, the euro will fall further. A stand-by arrangement would present all options
- initially, even if Greece is unlikely to choose restructuring or EMU exit.
- Longer term, IMF involvement would force Europe to adopt a permanent solution to sovereign stress,
- either with the fund or a regional equivalent. Such an institutional arrangement would be europositive.
- Strategy: Keep majority of risk in the crosses; buy 12-mo USD/JPY upside.
- Trades: In cash, sell GBP/CHF again. Stay long CHF vs EUR and JPY, and long CAD vs GBP, NZD
- and AUD. Stay long NOK/SEK and AUD/NZD. In options, buy a 12-mo USD/JPY call (92 strike) with
- a 3-mo window knock-out (86/94).
- Next week: EU summit, Congress confronts China, UK pre-election budget, Norges Bank
Last month we argued that a European liquidity fund was required for long-term EUR/USD stability, since it
would address EMU’s long-standing institutional weakness. In the US, Japan and the UK, the sovereign’s lender of last resort is the central bank, which can forestall default by purchasing government debt, albeit at the risk of inflation and currency debasement. EMU forbids the ECB from acting in this capacity directly1. While this restriction may deliver lower inflation over the long term, it also limits Europe’s ability to respond to liquidity constraints in the periphery unless member governments agree to lend bilaterally
FX Outlook: What the IMF means for the euro FX Markets Weekly [J.P. Morgan Securities Ltd] $FXE
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