EUR USD (1.4310) The Moody’s downgrade of Portuguese sovereign caused investors to push up bond yields in Portugal and right across the eurozone periphery. The euro was set back too. The development caused the EU officials to threaten regulatory action against the Big Three agencies. Their complaints are not new. Last June, in a Frankfurt speech, the ECB’s Jürgen Stark heaped scorn on the rating agencies for their ‘irresponsible’ pro-cyclical behaviour. On the very next working day, Moody’s downgraded Greek debt four notches to junk. Given the subsequent negative developments in the Greek economy, it is difficult to argue that the rating agency was wrong in this decision even though, in all likelihood, the downgrade contributed to the deterioration. Mr Stark would, nonetheless, still defend his opinion that the timing of the rating decisions is poor. Often, they come precisely as finance ministers are meeting to discuss crisis solutions. A year ago, therefore, EU officials began efforts to sidestep the agencies, for example, by changing the ECB collateral rules. Today, we note that officials continue to discuss solutions such as a debt rollover even though Moody’s and Co. have already indicated that such a solution would be labelled a default.
Even without quitting the sideways pattern that has characterised the last two months, the euro could still retreat to 1.4175, the current risk. No positive sign could be given until it again clears 1.4465.
Market Bias IndexTM
The euro bias is again on the rise – this time in the direction of undervaluation. Traders look likely to perceive the euro as too cheap against the CHF, the CAD, and the AUD.
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Deutsche Bank
Fixed Income Research – Global