Modest excitement over Barroso speech to quickly fade?

A modest rally in Euro crosses this morning in the wake of a speech by EU Commission president Barroso, who proposed Euro Bonds and a Financial Transaction tax. Anything in this for the Euro?

In a State of the Union speech this morning before the EU parliament, Mr. Barroso proposed the introduction of EuroBonds or Euro “stability bonds” (with specifics to arrive in “coming weeks”) and a Financial Transaction Tax (FTT rumored to be 0.01% per transaction on equities, bonds and derivatives. Status on currency transactions unknown). On the subject of the FTT, the recent round of debate on this matter from some 10 days ago saw Italy, Britain and Sweden against the measure, while France, Spain, Denmark, Belgium and Germany  are considered in favor. The tax, if it is passed one day, may not be implemented until 2014, so one wonders at the immediate impact, even if the whole idea is a rather significant one. On the subject of Euro Bonds or stability bonds, can Germany ever pass such a thing? Seems doubtful and the more likely route may be the “Enronized” EFSF proposals that have come to the fore of late.

While the Euro rallied a bit during Mr. Barroso’s speech, we make a brief reality check by looking at the forwards, interest rate spread changes and basis swaps, all which suggest nothing has materially changed from this speech, and thus suggesting that the range will hold here all other things being equal. So from here, the EURUSD will likely go back to following the influence on risk appetite/positioning/end of month/quarter developments. On that note, Zero Hedge reminded us in its dramatic way this morning that many funds out there are hurting (and Goldman Sachs announced the closing of its Global Alpha fund – a key industry indicator if there ever was one).

Chart: EURUSD
EURUSD rallied closed back to yesterday’s highs, but various indicators point to little reason for today’s rally and suggest that the pair is getting expensive at current levels given the backdrop. Of course, any extension of yesterday’s equity rally could put the greenback under pressure. To the downside, the 1.3550 area has taken on considerable significance over the last few days and might act as a support/pivot zone.