The massive 200-pip jump in EURCHF in less than 10 minutes (13:00-13:10 BST) is the work of no other than the Swiss National Bank intervening to sell its own currency. But the 80-90 pip jump in EURUSD must also be the work of European banks intervening on behalf of the ECB to boost the ailing euro. The events of the last 2 weeks imply that coordinated central bank intervention is possible. If it took 2 days for the ECB's to make an about turn on bond-purchases and for Berlin to institute a ban on naked shorts, then the prospects for intervention are very plausible. If neither the IMF/EU/ECB plan nor the Berlin announcement succeeded in alleviating selling on the single currency, coordinated central bank intervention must be utilized to at least slowdown the pace of the decline. While this is unlikely to reverse the slide in the euro, it will help resurrect a 2-way market in the currency and slow down the damage.

Euro Longs to Remain Naked

Unless the German ban on naked CDS shorts is instituted on a European or global level, its effectiveness will come up short. Unlike equity markets, credit default swaps are traded privately, and not on exchanges. And the fact that the bulk of these markets are in NY, the German ban will do little to prevent shorts from trading outside German shores. Also, according to the Deposit Trust & Clearing Corp (CDS clearing agency), outstanding CDS on most Eurozone sovereign debt does makes up less than 10% of the entire CDS market, estimated at $11 trillion. Chancellor Merkel's unilateral ban is an ad-hoc measure that partly aims at containing her declining popularity following her Party's defeat at last week's regional election. Unless similar measures are adopted by the France, UK and US, these will prove to be no more than desperate politicians waging a losing war against speculators.

High Yielder, Highest Loser Down Under

It is NOT the euro that is the biggest loser since Tuesday's close, but the Aussie, followed by the Kiwi and the Swedish Krone. The Aussie falls victim to its own success of higher yields, which are especially under scrutiny after the RBA hinted at a pause in its tightening cycle two weeks ago. We warned in our May 11th piece "Endangered Aussie Carry" that the latest sell-off in global equities has begun to unwind one of the few remaining carry trades in the non-emerging market FX space; AUDUSD and AUDJPY drop 3.8% and 5.4% respectively.

The technical significance of last night's break below 0.8580 implies further selling of another 5% from current levels. The 0.8580 low was held in Sep-Oct 2009 as well as in Feb 2010. Last night's failure implies a decline to as low as 0.80 and 0.78, especially if no close above 0.86 is attained this week.

Gold vs. other Commodities

Gold is finally responding to a broad sell-off in commodities. This was not the case on May 6 when the 9% intraday plunge in equities saw gold shrug off selling in copper, crude and natgas. The latest 24-hours are seeing less resiliency in gold, as the risk of deteriorating equities could force some managers into selling their winners (accumulated gold gains) to meet their widening gains. If the aforementioned suspicions of coordinated euro buying by the central banks are confirmed, traders could begin unwinding of their GOLD/EUR shorts, thereby, exacerbating the recent selling in GOLD against other currencies. Gold drops 3% against EUR from its €1,010 record high. Further pullback towards €960s could call up $1,165-70, followed by $1,120.