It appears that the market refuses to be baffled with bullshit any longer. The EURUSD just took a big tumble following a report that Christine Lagarde, the IMF's new boss, announced that her new agency has not yet discussed Greek aid details, and made it clear that "nothing should be taken for granted on Greece." Since the only thing that is being taken for granted is that Greece will be bailed out, it is easy to see why the EURUSD just lopped off 60 pips in seconds. Not very surprisingly, this fits with what the Chairman of Commerzbank Martin Blessing told the Frankfurter Allgemeine Zeitung earlier. It appears that the dining room table is being set for what the EUR's chef believe will be a brief feast on the Greek carcass, following the country's plunge into SD, or temporary default status. What will happen next, however, is the same thing that happened when Lehman filed: sheer panic, as a global bank runs ensues, and the USD, not to mention gold, all go parabolic. The only possible brief saving grace is once again China, which just reported that its FX reserves rose from $3,197 billion to $3.233 billion. The bulk of that money is now going to purchase EURs and keep Europe afloat one more day.
Here's why it will be a sleepless night for FX (and thus ES) traders around the world:
The International Monetary Fund isn’t yet discussing details of a second joint bailout package for Greece with the European Union, said Christine Lagarde, the fund’s new managing director.
“As regards a possible new program, in my view we’re not at the stage of discussing the conditions and terms and length and volume, and nothing should be taken for granted,” Lagarde, who took up the job on July 5, told reporters in Washington today.
First Deputy Managing Director John Lipsky has been closely involved in the current Greek program and is representing the IMF at the finance ministers’ talks after “ample meetings all together to properly define the position of the fund,” Lagarde said.
She spoke before European finance ministers today said they were considering using bond buybacks to ease Greece’s plight as surging bond yields in Italy and Spain brought the crisis closer to the heart of the euro area. The announcement came after talks with bondholders over a “voluntary” rollover of Greek debt ran into opposition from the European Central Bank.
What about Italy? Fear not - there is a firewall.
Italy’s effort to build a firewall against the spreading crisis formed the backdrop to today’s meeting in Brussels. The nation, struggling with Europe’s second-highest debt load after Greece, curbed short selling as its 10-year bond spread over Germany surged to 305 basis points, a euro-era high.
Lagarde said Italy is “facing issues at the moment which are essentially market-driven.” She said growth in the euro region’s third-largest economy needs to improve in parallel to efforts to reduce the budget deficit.
“It is clearly a fact that Italian growth has to improve; that is essential to restore the situation in Italy, in addition to the fiscal consolidation measures that have already been decided,” Lagarde said.
There was also the usual scapegoating of rating agencies but readers can read that at their leisure.
Unless the PBOC manages to stabilize the bloodbath in the EURUSD, tomorrow will be ugly.