EUR/USD (1.3680) Against a backdrop of intense political debate over Greece, heightened tensions in the banking sector and continued European stock market declines, the euro struggled to find its feet yesterday. The selling, which ultimately dragged it below $1.35, was also accompanied by rising implied volatility. This suggests that more stop-loss selling was taking place. We suspect that many of these sellers were formerly buyers who had only stepped in on Friday during the periods of swollen trading volumes. This may mean fewer leftover offers waiting at higher levels than we previously thought. We still note potential supply at 1.3740 and at 1.3820, but would recognise any break of the latter as an early positive sign for the single-currency. Until this is the case, however, the risk will remain for a resumption of the slide all the way to 1.3090.
This morning’s early bounce has been helped along by the news that China could become a significant purchaser of Italian debt. Whilst reassuring, we note this potential demand is purely commercial. Unlike EU support, the amounts involved will correspond to what China wants, not necessarily to what Italy needs. It also became known overnight that US Treasury Secretary Geithner will exceptionally join an EU finance ministers on Friday. As Geithner attended a G7 meeting just last week, traders believe there must be something new – possibly coordinated – to be discussed.
Market Bias Index
The dominant perception of US-dollar overvaluation has moderated today but, even excluding the massive USD/CHF bias, remains at relatively high levels.
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Deutsche Bank
Fixed Income Research – Global