After an extremely hard sell-off which began Monday, the Euro stabilized on Friday and actually finished higher for the day. With the way information has been distributed this week, who knows why the market settled higher. Technicians will claim oversold conditions but that reason could have been used since Tuesday. Fundamentalists may claim that there was a delayed reaction to Jean Claude Trichet’s comment on Thursday that “Greece will not default.” Maybe CNBC failed to play the video of unrest in the streets of Greece. In my opinion, the Euro stabilized on Friday because maybe someone saw the European Central Bank flinch.
As the Euro tumbled and the world watched the turmoil in the streets of Greece, the ECB sat comfortably on its collective hands. The staunch posture of Germany was never so obvious until this week when it most likely was the main country standing in the way of a bonafide rescue effort of the Euro. Watching the events unfold this week, I truly felt at times that Germany was taking pleasure at the way the events have turned out.
Despite attempts to calm investors and instill confidence in the Euro the ECB, led by its President Trichet, failed miserably to reverse the decline and make investors feel good once again about holding on to the Euro. As the Euro collapsed and the fear of contagion gripped the Euro Zone, I could only remember images of the hawkish ECB that waited until the last possible moment to begin cutting interest rates in July 2008 when every major central bank had already begun doing so.
The situation in the Euro Zone has backed the ECB into a corner and now the world is watching once again to see if the ECB is ready to act with clarity and conviction in an attempt to right the ship. Coming into Friday’s session, the ECB had three choices: either restructure Greek loans, lower interest rates to zero or begin buying Greek bonds. At this point, it is going to take more than just a few reassuring lines from Trichet.
Whatever it took to stabilize the Euro on Friday, no one will ever be certain; it may have been the way events unfolded this week in Greece or it may have been a well placed phone call from Fed Chairman Bernanke. It may have been the beating Trichet received from investors after he said Greece wouldn’t default and that the ECB hadn’t discussed buying Greek bonds in the secondary market.
I am not certain of the cause, but I do have a feeling something caused the ECB to flinch. What Friday’s action is telling me is that a plan is being worked on. It may not be the greatest plan in the world, but steps will be taken this weekend to attempt to fix the Euro. Don’t be surprised by an announcement over the weekend or early next week that the ECB will get off its hands and invoke unconventional means to shore up the Euro.
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