Germany, the undisputed leader of the EU, which in turn is the largest GDP producing block in the world, has said that it is changing the rules of the game big time. Any shorts of European debt on an uncovered basis will need to scramble to cover.
It is worthwhile reading this article in the Daily Telegraph for a run down on what happened. I don't think the market gets it yet but if they are caught short Greek, Spanish, Portuguese or any other European debt market they will need to buy these bonds to cover their naked short positions. This will spill over onto the EURUSD. Expect a big rally tonight.
Amongst those caught short the EUR across the board will be the systematic traders. Depending on how this rally unwinds there may be some pain in store for these CTA funds.
What happens with EURJPY will be very telling. If the rally in the EUR is strong enough to turn the USDJPY around then we are heading up a long way in the Euro across all crosses.
Position wise I'm long EURUSD.
Frank
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