EUR USD (1.4060) Short-term traders had it their way yesterday, as their various selling arguments accompanied the euro on a brief dip below $1.40. Market participants reiterated the negative developments from the weekend in a litany of what’s wrong with the EUR/USD, and seasoned the argument with Belgium’s credit outlook downgrade, a worse-than-expected eurozone PMI, volcanic ash drifting out of Iceland, and so forth. In contrast, politicians made a considerable effort to assure the markets that they will battle to keep Greece funded, stopping at nothing to prevent a credit event. After Junker’s proposal to ‘reprofile’ Greek paper by allowing for a mutually-agreed maturity extension, other solutions like a Brady bond equivalent have ventured forth. In this case the ESFS could swap Greek paper for its own AAA instruments in exchange for a haircut. But who would be the first to swap, knowing that by doing so would reduce the chance that the remaining Greek bondholders will suffer any negative consequences? Another option is the Greek government’s proposal to create a sovereign wealth fund out of state assets. Athens plans to raise €50bn on the venture. It would also be possible to issue bonds on the collateral, which would satisfy the Dutch finance minister. The advantage here is that the jewels would remain in Greek/EU hands.
The risk for the euro still extends to 1.3910 and, below there, to 1.3800. The first sign of improvement would be a break of 1.4160, but we wouldn’t call the euro bullish until it mounts the 1.4310 resistance.
Deutsche Bank
Fixed Income Research – Global