Mario Draghi Committed To Saving the Euro

Finally, some years later and after much pain has been inflicted upon the Eurozone, someone finally spoke with conviction on the Euro and the monetary area. Mario Draghi, at a London conference, said the ECB will do “whatever it takes” to save the Euro and has ignited an explosive rally in equity markets and sharp reduction in bond yields.

The Eurozone has been struggling, with Spain and Italy right at the epicentre of concerns. A few days ago, Spanish 10-year government debt yields rose to more than 7.5%, a level that makes it difficult for the government to fund itself for a prolonged period of time and that has in other countries ended in triggering a full bailout.

There has been much discussion by politicians around the Eurozone problems and with countless summits. No permanent solution has yet come from any of them and so this has put the weaker member states in a parlous state where they are exposed to high levels of speculation on their sovereign debt. The lack of action or mandate to act has put the ECB on the sidelines instead of giving it the necessary tools to extinguish the fire. Until yesterday.

Mario Draghi’s latest words were, for the first time during his tenure, particularly strong and forthright. Germany does realise how important it is to keep the Eurozone alive, unlike what many commentators have been stating so far. It is not in the interest of the country to have Greece and others out (see Spreadbet Magazine August edition “Spreadbetting on a Eurozone Breakup”, link here- http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v7_generic – page 62). European leaders have now decided to actually do something and will likely assist the ECB in buying Spanish and Italian debt. The French newspaper Le Monde stated that the ECB and the EFSF are preparing for coordinated action to alleviate sovereign debt yields. The news came as a relief for many, especially in debt markets. At the time of writing, the yields on Spanish and Italian 10-year bonds are back below 7% and 6.00% respectively, a significant drop from the highs seen earlier this week.

Many sectors of the media will still be stating this promised action is just that – more promises and rhetoric without the will behind the words. Others will point to the difficulties in approving any measure inside the EU given the countless number of members. In my view, there is in fact a will to do something at this point and the ECB will most likely act. The Germany many knew as the main force opposing bailouts and the Euro no longer exists. Germany is finally aware of the costs to its own economy that will result from a breakup and will most certainly prefer to avoid them. Finland is the lone dissenter now and in an ironic twist could actually be the country that rejects the Euro and breaks away!

Eurusd pair

Markets ended the week very much in risk on mode and the Euro may be in the early stages of an uptrend. Only time will tell if this is to last, but for now it seems that running with the crowd and remaining long the EUR/USD pair is the trade for next week. If actual action materialises from European leaders, the pair could easily approach the levels seen around 1.2650 in June and probably even higher. To avoid a sleepless night, put a stop loss in around 1.2030, a multi-year low seen just a few days ago.

Filipe R Costa