The EUR was on a wild ride in Q1. It rose sharply as the ECB’s balance sheet shrank due to LTRO early repayments, but then fell on the uncertainty generated by Italy’s election results and the Cyprus solution, which saw the Troika going after bank depositors to help fund the bailout due to the nation’s status as a tax haven with an over-sized banking sector. From here, the EU will have a hard time restoring confidence in the currency as we have the interminable wait until the German elections in September and the unknown path for Italy to boot, says John Hardy, Head of FX Strategy, Saxo Bank, in TradingFloor.com's Q2 Insights. As well, France’s economic trajectory is a growing worry, while tiny Slovenia will likely need a bailout. And don’t forget Spain, where new bank scandals could hit at any moment and the social fabric is being sorely tested with every passing month. The most interesting thing going into Q2 is the advent of the Cyprus bailout/bail in. Will direct “wealth confiscation” develop as a meme from here as a way to fund the restructuring of our over-indebted economies going forward, rather than on a tide of printed money? 

There is the possibility that Europe could limp along until the German election in September. If a new full-fledged EU crisis hasn’t broken out before that critical event, we would expect a rapid move towards whatever solution for Europe awaits in the months that follow – either with an Angela Merkel mandate or more chaotically due to the potential for splintering German politics.

For more on TradingFloor.com's Insights for the second quarter 2013 see: http://www.tradingfloor.com/blogs/quarterly-outlook