The aftermath from last week's elections continue to weigh on the markets, and in currency markets, the threat of political change is the most important driver. The Greeks voted for those who opposed the austerity plan recommended by the Troika, but have no plans for repayment of debt coming due. They want the advantage of remaining in the eurozone but they do not like the price that comes with it.
For the Germans and their allies the question has become, is it cheaper for the Greeks to leave and for them to stay? The Greek's, with the help of Goldman, cooked their books to get in the euro, and have since been on the dole within the euro. There may be little remorse should they leave.
The recent votes in France and Greece, as well as those in Schleswig-Holstein and North-Rhine Westphalia all confirm Chancellor Merkels austerity plans are not selling well with the voters. It looks like the bills for the unfunded political promises are coming due, in much of the developed world. With most European governments spending about 50% of their GDP, and the private sector shrinking, Hollande's call for growth to bail them out is comical.
There are rumors that the Germans, recognizing the political and economic costs of "austerity," are going to encourage the ECB to print some money, perhaps a lot of money, as they concede a little inflation will need to be accepted. Typically, it takes a sever crises to foster effective change. Are we there yet?
There are two excellent articles that euro traders should read. The first, "As European Austerity Ends, so Could the Euro" was published as an opinion in Bloomberg yesterday. The other is an opinion piece in The Telegraph today, "Brace,brace. Dark times ahead as Greece heads for the exit."
Markets are supposed to look ahead and discount the future. How much of this is already in the market? Granted the specs are heavily short, and they could rally the market if they cover. Even after considering the big short, it is hard to make a case to buy the euro.