The remarkable arrest of Dominique Strauss-kahn, the Head of the International Monetary Fund yesterday by the New York Police Department is likely to create embarrassment across Europe, but it is doubtful that it will in any way derail talks to extend Greek loans and financing terms over the next two days at the Euro-area finance Ministers Meetings.
The IMF will be represented by Deputy Managing Director Nemat Shafik, while John Lipsky will assume Strauss-kahn's roll as acting Managing Director. On May 12th, a full 3 days ago, Lipsky announced he would be leaving the IMF on August 31st 2011. Although this will leave a leadership vacuum within the IMF going forward, it is unlikely to cause delay in European talks. If anything, we would expect the IMF will be more lenient in their negotiations, given they have received a black-eye this weekend.
We expect the initial market knee-jerk reaction will see the EUR/USD sell-off on the uncertainty surrounding the next few days. However there should be good support for the EUR/USD around 1.4000; and as the uncertainty surrounding Greece clears in the coming days we expect a strong rebound higher in the EUR/USD and lower in the USD in general, as the market turns its focus on US fiscal problems and the debt ceiling.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.