Euro Spikes as Rumors of Bond Short-Selling Ban Circulate

CSI Forex, a market data provider and investigative company, reported Friday that the rapid spike in the EUR/USD was caused by a rumor that European leaders may be about to implement a short selling ban on sovereign debt. Such a ban would effectively cap yields at current levels and potentially cause a massive short squeeze in bonds. The EUR/USD spiked from near 1.2240 to just shy of 1.2325 before retreating back towards 1.23. However, these rumors have yet to be confirmed and markets are awaiting official comment from leaders for further clarity.

One reason for the retracement from highs could be the Finnish Prime Minister Jyrki Katainen's comment that neither the bailout funds nor the ECB should buy sovereign bonds. Katainen commented in an interview with the Wall Street Journal that the European Stability Mechanism (ESM), the permanent bailout fund, should not be allowed to buy bonds on the secondary market. However, previously established plans only call for the European Financial Stability Facility (EFSF) and eventually the ESM to buy bonds on the primary market. Thus, these comments may not be so earth-shattering.

Katainen openly opposed the European Central Bank buying bonds in the same interview. This was a departure from ECB President Mario Draghi's plans to "do everything within [the bank's] mandate" to support bond markets and protect the euro. The Journal interview followed comments from German leaders, including Bundesbank President and ECB Governor Jens Weidmann, that the ECB should not be seen funding government's debts, which is against the bank's mandate. Moreover, Katainen opposed Eurobonds and stated that the Eurogroup has no plans to implement them.