EUR USD (1.3990) The intense pressure on EU peripheral sovereign debt and on the euro continued yesterday. Investors seemed resigned to the idea that credit rating agencies would label any solution for the Greek crisis that emerged from the EU finance ministers a default. The Dutch representative reinforced this view when he suggested that this option was not ‘off the table’, but traders had already noticed that officials never retreated from the debt rollover option despite last week’s warning by rating agencies. Yesterday’s price pressures went much further than Greece: as Italian and Spanish 10-year debt yields climbed towards 7 percent – the unofficial rule-of-thumb for an EU bailout – trading probably reflected the concern that both countries might ultimately require a rescue, the resources for which are not there. The subsequent euro rebound suggests that the pessimism was overdone. But even later in the session, as market prices began to correct from the day’s brutal market moves, Moody’s announced a renewed downgrade of Irish debt to junk.
The euro recovery was helped by the Fed minutes, which indicated the door to QE3 was not closed. It was instructive to note that our 1.3810 demand point had been able to limit the earlier damage. A break would have ushered in declines to 1.3660 and then to 1.3450/510. So, we continue to monitor support there. To point to a stabilisation, however, we would have to see the euro climb back above 1.4115.
Market Bias Index
Despite the yesterday’s sizeable price swings, the perceived undervaluation of the EUR/USD is likely to have shrunk slightly. However, the euro’s undervaluation bias versus the CHF and the JPY remains very marked.
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Deutsche Bank
Fixed Income Research – Global