EUR/USD (1.3530) David Cameron told Canada’s parliament last night that ‘the problems in the eurozone are now so big that they have begun to threaten the stability of the world economy’. The UK prime minister said that eurozone leaders must quickly implement what they have agreed upon. At first glance, this is a particularly downbeat stance for a world leader. Yet, this seems to be the standpoint of an increasing number of key policymakers from the ECB, the IMF, the World Bank, as well from heads of government from Britain to the BRICs. Private economists are also very gloomy because of mounting evidence of a global economic slowdown against a backdrop of fiscal tightening. The credit rating agencies are hyperactive. Indeed, it is difficult to remember a time where from there has been such universal pessimism in the market. As a consequence, the kind of asset price sell-off seen this week is hardly surprising.
The euro also came under pressure initially during yesterday’s flight to safety, but it showed some surprising buoyancy later on. It stopped just ahead of 1.3360, the level we had labelled as the initial downside risk, and recovered towards opening levels. This is not enough to consider it near-term stable, however; for this it would have to overtake 1.3690 (adjusted lower). Thus, we remain focused on the downside and still draw attention to the second downside risk level: 1.3210.
Market Bias Index
The dollar stretched its already sizeable perceived overvaluation even further yesterday. The AUD’s continued sell-off has pushed it some 6 percent away from the level traders are likely to view as ‘fair-value’.
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Deutsche Bank
Fixed Income Research – Global