EUR/USD (1.4330) Wolfgang Schauble, Germany’s finance minister, suggested yesterday that a stable euro should be motivation enough for the private sector to agree to a Greek debt rollover. Effectively anchoring the reference point for an eventual outcome at zero, Mr Schauble’s gambit might be perceived by investors as a threat to their wealth if they refuse to go along. Indeed, if accepting new terms on the money private investors have loaned to Athens were truly voluntary, eurozone officials would not have to tell them anything at all. The rating agencies, at least, see things that way; in their opinion any form of rollover is, in fact, a default.
According to our Market Bias Index, the euro has practically reached its ‘breakeven’ status against the dollar, effectively letting any stranded euro bulls liquidate their positions with no appreciable (perceived) damage. That should take the risk of forced sales off the currency, though the sales could still push it lower again. Meanwhile, stabilisation waits on the far side of 1.4455. On a side note, an article in today’s Financial Times reports that 75 percent of China’s $200bn increase (January-April) in foreign reserves was not channelled back into the US, all but confirming our assumption that Beijing was the source of long-term euro demand that we referred to earlier in the year.
Market Bias Index
The major currencies, with the exception of the Swiss franc and the yen, are presently trading around ‘fair value’. Even the embattled euro reached its ‘breakeven’ point this morning.
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Deutsche Bank
Fixed Income Research – Global