EUR USD (1.4150) Reuters reported yesterday that Germany wants the deadline for a second bailout package for Greece to be pushed back to September. Frau Merkel will meet with French President Nicolas Sarkozy today and try to reconcile their differences over whether to allow for an orderly restructuring of Greek debt. Germany wants bondholders to share the burden, while France, siding with the ECB, says that forced involvement could trigger a default. Market participants sense that the endgame is near: they suspect a bailout with fewer conditions will be done and that hard restructuring will be avoided, but it appears that their tolerance for ambiguity is waning as the solution draws closer. One might have predicted months ago that officials would bargain hard then reach an agreement at the last moment – the pattern of the entire crisis – but as the eleventh hour comes closer the market obviously perceives the risks more acutely.
Financial markets don’t like uncertainty, and the rollercoaster ride to the second Greek bailout is beginning to take its toll. Although the consequences of the alternatives aren’t completely clear for market participants, every additional delay only compounds their doubt. The result is that traders expressed their misgivings with their feet this week by fleeing from euro engagements. The single currency is vulnerable for losses to 1.4010, and the risk remains until it can mount the 1.4325 barrier. Stability lies beyond the 1.4450 level, however.
Market Bias Index
Not only euro weakness, but also US dollar strength imposes itself on the Market Bias Index today. Interestingly enough, the greenback is perceived to be nearly as overvalued as the Swiss franc.
Deutsche Bank
Fixed Income Research – Global