The movements in the EUR/USD around ECB President's Mario Draghi
comments were nothing short of remarkable. The currency pair moved
in what can only be described as ridiculous volatility. The EUR/USD
spiked above the 1.24 level, reaching a high of 1.2406, before
retreating and making new lows below 1.22 near 1.2175.
The volatility in the pair saw it trade in approximately a 230
pip range, or about 2 percent. This sort of volatility is rare in
the EUR/USD cross, which normally trades in a more orderly, less
volatile pattern. Initially, as shown on the chart below, the pair
spiked on comments from Draghi that he is concerned with high bond
yields on the sovereign debts of Spain and Italy. Further, Draghi
said he does not believe that the risk premiums built into the
bonds is accurate. On this news, the pair jumped from 1.2261 to
1.2406 in about an hour.
However, as it became apparent that Draghi was not about to
imminently purchase bonds on the secondary market and was not about
to step up to support sovereign finances, the pair began to fall.
Fears that Spain will need a full sovereign bailout without ECB
support quickly sent the pair back down, falling as low as 1.2175
from those highs. The intense volatility could also be seen in
peripheral bond yields and other risk assets.
Spanish 10-year yields traded as low as 6.6103 percent ahead of
the press conference, even after a slightly weak Spanish auction
earlier Thursday. However, the same 10-year bond yields traded back
to new highs after Draghi refused to purchase bonds, near 7.032
percent. Yields on the 2-year bond rallied higher as well, however,
gains were limited as Draghi indicated that any future bond
purchases would be targeted at short-term bonds.
Given the volatility in the pair, traders may conclude that the
markets are losing faith in Draghi's ability to preserve the euro.
Central bankers are only as powerful as their credibility, and the
fact that Draghi promised new bond purchases and did not deliver
will surely hurt his credibility. Unless he can convince
conservative Germans to get on board with bond purchases, or he can
convince Spain and Italy to enter full sovereign bailouts, Draghi
may lose all of his credibility. This would send the euro lower, as
fiat currencies are only as strong as their central banks. Even as
Draghi said, "shorting the euro is pointless," traders may just do
the opposite and hope to be proven wrong.
Stock chart: (c) 2012 Benzinga.com. Benzinga does not provide
investment advice. All rights reserved.