The announcement of the $1 trillion EU/IMF rescue measure hit risk sentiment like a canon ball. The EURUSD gapped at the market open and quickly traded to 1.3043, roughly 2% higher than Friday's close. The huge package was designed to shock and awe markets, reminiscent of the 2008 US bailout. The emergency fund is aimed at calming markets, halting further contagion and mitigating systemic risk. Broadly speaking, the Euro-zone will use its existing stabilization fund, setup during the 2008 crisis, and add €60bn by issuing EU bonds. EU members will guarantee up to €440bn to be drawn by any member state facing fiscal difficulties. The IMF has further committed to provide an addition €220bn, on a case-by-case basis, to troubled EU nations. In addition to calming debt markets, the announcement was also aimed at addressing the growing stress in money and FX markets. The G7 central banks and the SNB have temporarily reopened USD swap funding facilities - thus allowing banks to borrow dollars directly from central banks rather than the distorted capital markets. The weekend's announcements represent a complete about-face in policy. The ECB has decided to take the Nuclear Option and buy EU sovereign debt directly in secondary markets, an undeniable form of the unconventional measures we were expecting - regardless if they later announce the purchases will be sterilized. Furthermore, the ECB has promised to actively conduct 3m and 6m liquidity actions in the hopes of smoothening out distressed markets. (check this last sentence) Overall, we're expecting a knee-jerk reaction on the Euro, however our long-term sentiment remains cloudy. Even if today's crisis is averted, officials will still have to wrestle with 3 longer-term issues: structural concerns about the EU system, possible growth hindrance due to fiscal austerity measures and lastly, being outperformed in the global market place by competing states (US payrolls jumped by 290,000 on Friday). Even with the weekend's big announcement, we judge the upside on the EURUSD is be extremely limited. Risk correlated FX trades should continue to perform well and we suspect both global equities and commodities to rally strong. Emerging market currencies held up surprisingly well to stresses on the Eurozone which could foreshadow some interesting developments in the future. Last week's postponed BoE meeting, delayed on account of the UK election, will happen today. Due to the crisis in the EU, the UK election and May 12th inflation report, we expect the BoE to hold the current policy rate and emphasize their asset purchase program remains on hold. Today's economic news will be dominated by pundits debating the merits and unforeseen outcomes of the EU announcement. However, our attention will be on the reaction by stock markets. If we get a sustained rally in equities but a struggling Euro, we will remain bearish on the Euro in the near term.
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