We have long been discussing the fundamental paradox dichotomy that Europe finds itself in, where on one hand the continent needs ECB intervention to keep it together with indirect debt monetization and current account deficit funding via TARGET2, yet on ther other, where ECB intervention always ends up pushing the EUR higher relative to its FX peers as the natural trendline of the artificial currency is to its natural long-term price level: 0.00. The problem of course, is that the higher the EUR goes, the weaker German exports become, and as we observed just this morning, the faster Germany's collapse into recession happens. Sure enough, Europe finally figured out what has been obvious to virtually anyone with half a brain for many months:
- JUNCKER SAYS EURO EXCHANGE RATE 'DANGEROUSLY HIGH'
That's great, and we agree with Juncker for once, but there is major problem with this: the lower the EUR goes, the greater the redenomination risk. Sorry Europe - that's just the way it is. The second the EUR goes back to the mid and lower 1.20s (or below) PIIGS bonds will go bidless, liquidity will go bump in the night, currency swaps will get all banged up, and "redenomination risk", or fear of currency implosion, will once again rear its ugly head. But at least German exports, and thus German GDP, and thus the only viable economy in Europe, will prosper.
Sure enough, the EURUSD plunges the second this latest vberbal intervention hits:
In other words, while Europe wants its cake and to eat it too, it can't have it both ways. Unless of course, the ECB is in regime change mode, and instead of pushing the EUR higher going forward, it will send it lower, only for Mario Draghi come out and tell everyone to "not short the Euro, beeleeevee me."
What is worse is that with all correlation algos pegging the ES to the EURUSD, a shift out of Europe will mean lower risk asset prices in the US, and more easing out of the Fed, which in turn will push the EUR once again much higher.
And so on.
Oh, aren't currency wars so much fun, especially since Mario Draghi may now want to reassess his advice from last July, that "it's pointless to go short on the euro." So... is it pointful now?
Last, but never least, because we can't say it enough, Tom Stolper FTW.