Slam the brakes
When something's not working, what's to be done? Abandon ship is one answer or you could throw yet more of the same in the hope that the walnut caves in to the pressure.
That's the dilemma facing European Central Bank president Mario Draghi at this afternoon's pivotal meeting after "tremendous, disruptive moves" in the corporate bonds markets over the last 48 hours.
"It was a very volatile situation yesterday with bunds taking a dive on every bit of positive news on a possible Greek deal," says Simon Fasdal, head of the fixed income desk at Saxo Bank in Copenhagen. "With EU CPI coming in a touch higher than was expected, this also took some deflationary pressures out of the market, weighing more heavily on bunds."
Bunds were trading at around the 152.60-70 level just before 0700 GMT this morning. Yields spiked some 25 basis points at the same time from 50 to 75, sending equities into risk-off mode across the globe and boosting EURUSD.
"Higher yields, a stronger euro and lower equities is the exact reverse of what the ECB set out to achieve," says Fasdal. "We did not expect a lack of buying in equities as a consequence but risk-on sentiment is simply not there."
"The ECB wants the reverse effect to happen."
Will he, won't he?
Which brings us back neatly to Draghi and whether he is prepared to up the stakes on so-called "front-loading" of QE.
"There is a good chance we will see Draghi today really emphasising that there is a huge capability to use front-loading even more and that this is not at an end," says Fasdal. "He could go for, more or less, unlimited buying."
Purchases via the ECB's QE programme in May were €63 billion versus a target of €60bn.
Fasdal thinks that something along these lines is highly likely and if successful, would engineer a fall in EURUSD, lower yields and an equities rally, the reverse of the current environment.
Crest of a wave
It will certainly give EURUSD bulls something to think about if Draghi unleashes "rhetorical bazookas", says John J Hardy, head of forex strategy in Copenhagen. "He will really need to impress the market."
"There has been a massive squeeze on the euro which is still clearly the consensus trade," says Hardy. "We need some very strong data from the US between now and the end of the week to see if the dollar rally can get back on track. If not, we're looking potentially at a rangebound summer for the pair."
EURUSD was at 1.1170 at 0655 GMT. Data points ahead for the US this week include the ISM manufacturing and the pivotal nonfarm payrolls print due out on Friday.
From the euro side, says Hardy, the ongoing Greek farce continues to weigh "with the risk that this will drag on for weeks more yet," and possibly impacting the likes of EURCHF which has started to stir towards 1.05 on the speculation surrounding a deal.
And finally....
From the Floor regular USDJPY may be feeling a bit left out in the all the uproar surrounding bonds and EURUSD, but it too has started to reverse some of the losses of the last week or so after having poked its head above 125.00 earlier this week.
USDJPY was at 123.93 at 0655 GMT this morning.
"We're looking at 122.00 as the key support level here," says Pierre Magnussen from the FX Options desk, who also adds that NZDUSD is continuing to feel the weight of a potential rate cut by the Reserve Bank of New Zealand next week to send its traded weight for the year down below 75 for the first time.