There are two important points to be drawn from the events of the weekend. The first is that the real split in the Eurozone is not between Greece and the rest of the Eurozone or even between the southern peripheral nations and the rest of the Eurozone. Instead (and exactly as it has since EMU was first mooted) it is between the "hard money" north and the rest. Indeed, it is worth recalling that by 1977 the snake had become little more than a DEM zone with just the BEF and Luxembourg franc, the NLG and the DKK tracking it. The apparent split between Angela Merkel and Francois Hollande ahead of the Eurozone summit yesterday was therefore no more than a logical continuation of the pressures that have defined the European currency system for 45 years. The second (and possibly more profound) point is no-one can now doubt that the EUR is anything other than an exchange rate system rather than a single currency.
The fact that the Euro summit only reached agreement at 0741 BST today serves to highlight exactly how deep these fault lines actually are. While there may have been a degree of rhetoric in comments from Martin Schulz this morning, it also felt as if there were more than a grain of truth in the head of the European Parliament's comment to Deutschelandfunk that "in Brussels, things are on a knife edge and the euro zone could fly apart." Although the immediate threat to the EUR is now likely to ebb (assuming the deal is ratified), long standing observers of European currency policy will be left with the distinct feeling that it will only be a matter of time before the underlying fault lines come under stress again.
Moving beyond this (and also whether the Greek parliament will be actually able to vote through the deal), the one other point to be made is that the price action of the EUR this morning has only served to reinforce the point we have been making for several months now about its role as a funding currency for carry trade activity (i.e. that easing tensions should see the EUR weaken as investors return to carry trade activity funded out of the single currency). This point is easily made by simply considering the weakness that emerged in the EUR in late February following the presentation of a letter to Eurogroup President Jeroen Dijsselbloem outlining Greece's proposed reforms or the declines seen post June 22nd when following some (misplaced) optimism that an agreement was about to be reached between Greece and its creditors. In other words, the irony of today is that it may well mark the start of the next leg lower in the 14 month old EUR downtrend (as well as the resumption of a number of other risk on trends).