Euro shorts burned on Thursday — still being roasted on Friday:
It’s a European Financial Stability Facility-inspired short-covering/risk rally — Spanish and Italian sovereign bond spreads against Bunds are at their tightest since early December. But some are clearly wondering if the European Central Bank’s new take on inflation can carry the single currency much further than that.
In relative terms to reflation in the US and the UK, that is.
Here’s Schneider’s Stephen Gallo (emphasis ours):
Without saying more now, for various reasons – including a lack of QE complications – we believe that the ECB and EUR would have the ‘upper hands’ if the markets began to actively seek out inflation hedges vis-à-vis the currency markets…
As we look across markets today, we suspect (as we had even prior to Trichet) that there is a store of value trade taking shape through currencies. Importantly though, gold is falling in USD, EUR, and GBP terms – so we are probably not at a point yet where markets are losing faith in central bank inflation-fighting credibility. In short, it would appear as the ‘long gold’ trade is being dented by expectations of rising interest rates. It is no surprise then that gold was underperforming quite moderately in EUR terms, while it was down the least in USD terms…
We’ve seen the argument aired before – in fact, just before the Irish crisis blew up. So you’ll forgive us if we wait for more than rumour on EFSF improvement, as far as the peripherals are concerned.
Related links:
FX still mopping up excess volatility - FT Alphaville
Money flow misallocation – FT Alphaville