A Critical Weekend for the Euro

Yesterday we got coordinated central bank action to ease USD funding pressures in Europe. Now we have “informal” (read: extremely urgent emergency) two-day meeting of the Eurogroup finance ministers with US Treasury’s Geithner in attendance.

All eyes on Eurogroup meeting

Today and tomorrow, an “informal” Eurogroup meeting of all EU finance ministers is meeting in Wroclaw, Poland to discuss the next steps in addressing the EU’s ongoing financial crisis. Informal is hardly the word – the politicians and ECB will need to act now and in a big way as it is crunch time for the EU and its financial system. US Treasury Secretary Geithner will also be in attendance.

Yesterday, an article from Reuters made the rounds that suggested Geithner was recommending to his European colleagues that they “leverage up” the EFSF to sufficient size to get ahead of the pressures of the sovereign debt debacle, similar to the way the TALF program was employed to leverage public sector funds in the US. The challenges is that the EU governments have yet to ratify the new intervention powers of the EFSF that were agreed upon at the last Greek bailout round 2.0 meetings. The stakes of this meeting are rather clear after a rather breathtaking couple of weeks for the single currency, which saw a 1000-pip drop in EURUSD and the need for a coordinated central bank intervention to dig EU banks out of trouble from USD funding pressures.

But this “bailout” by liquidity yesterday is merely another stopgap measure – like throwing up a dam in front of a raging torrent that will eventually dissolve it only to continue raging until something  more permanent is crafted. To keep markets orderly and banks from failing across the EU, we’ll eventually need to see a sufficiently large package/commitment to stop the chronic return of funding difficulties, default risks, defunct regional  bond markets (the EU effectively ceases to function if Italy can’t sell/roll its debt). The “best” solution of course is a single EU finance ministry and the ability for it to issue EuroBonds – but that too big a step, at least for this weekend’s meeting. But this weekend could give us an indication whether the EU leadership is going to retrench and put more effort in moving in this direction, or whether we get more of the same (an alphabet soup of kick the can liquidity measures or simply the hope that the EFSF can be inflated to sufficient size to suffice).Remember my basic tenet that either it is Lehmanesque crisis time, or we get the Eureka moment that the solution is a de facto QE that continues to weigh heavily on the EURUSD.

Elsewhere, there is little to discuss, because there is no elsewhere at the moment. The US calendar only features the preliminary University of Michigan Confidence reading for September. But looking ahead, next week’s open will be very interesting in the wake of this Eurogroup meeting and we have to anticipate the coming FOMC meeting on Wednesday. In that light, an article title on the Bloomberg this morning trumpeted “Yen rally seen ending on Operation Twist” with the idea that the Fed’s interest in raising the yields slightly at the front end of the yield curve could relieve the pressure on the JPY to strengthen. Worth consideration.

Economic Data Highlights

• New Zealand Sep. ANZ Consumer Confidence out at 112.6 vs. 113.3 in Aug.

Upcoming Economic Calendar Highlights (all times GMT)

• EuroZone Jul. Trade Balance (0800)
• Canada International Security Transactions (1230)
• US Jul. Total Net Long-term TIC Flows (1300)
• US Sep. Preliminary University of Michigan Confidence (1355)