FX Update: EUR smacked by German court ruling

The US equity market came storming back into yesterday’s close and was on a very high note before the German constitutional court ruled on the legality of the ECB’s asset purchase programme (more on that below) perhaps on hopes for the shape of the recovery as California announced measures to lift lockdown restrictions. Front oil market contracts were likewise on the comeback trail and the US dollar was generally softer against the usual suspects (TRY a notable exception!) On today’s Saxo Market Call podcast we discussed whether some of this speculative energy is of the unhealthy variety and also discussed the status of the US dollar. The slide deck for that podcast offers a look at Bloomberg’s dollar index (slide 8), which has a very compelling technical line in the sand less than a percent below current levels – approximately coinciding with the EURUSD breaking back above 1.1000, AUDUSD back above 0.6500, USDJPY breaking down through perhaps 115.00, etcetera.

But interrupting the general cheer was the German Constitutional Court’s ruling this morning, which as of this writing saw the euro and Italian BTP futures under considerable pressure. The court dismissed part of the case with a 7-1 ruling, but raised objections to some of the ECB’s activities, and gave the ECB a 3-month ultimatum to “fix QE”, supposedly meaning that the Bundesbank can’t participate in the programme if the issues are not addressed. While the court ruled that the ECB programme is not in violation of the direct financing of government principle, it did raise objections about the “proportionality”, i.e., and said that the ECB’s move violate German law and the EU treaty. As the court wasn’t even ruling on the newer, PEPP programme, many are now seeing problems down the road for the legality of that programme. But the main message here is that the GCC has simply reminded the blatantly obvious: the ECB is increasingly operating as a force for mutualization for risk by beginning to violate the principles of purchases not based on the capital key (according to size of GDP of member countries), while there is no EU finance ministry or mutual debt. Hard to tell whether this is the spark for dramatic new pressure on the EU once again, but it is certainly putting the EU politicians’ feet to the fire.

Chart: EURJPY
The euro and especially EURJPY have taken quite a hit this morning in the double-take after the German Constitutional Court ruling, perhaps not because the court determines the EU’s future, but its ruling against some of the ECB’s activities could accelerate the crunch time for EU leaders to grapple what is truly necessary to get to the bottom of what ails the EU – its treaty and the lack of a solid foundation. The Euro and Italian BTP futures are feeling the existential pressure once again and EURJPY is suddenly eyeing the recent cycle lows again in the wake of the German court’s ruling – potentially opening up for a run toward 110.00 as a quick fix may be tough to come by.