EUR/USD (1.3615) Eurozone policymakers seem to have been rather dismissive of discussions about the transformation of the EFSF into a two-trillion-euro-heavy leveraged bailout vehicle. German finance minister, Schauble, has been notably critical and Bundesbank president, Jens Weidmann, has also indicated that the ECB would not play a role, a stance that reportedly has the full support of Jean- Claude Trichet (Financial Times Deutschland). Without it, the plan would be difficult to realise as the Bank is supposed to provide the cash against guarantees from the fund. Still, the idea that this will be central to the crisis solution has not fully died down; traders are likely currently evaluating options whereby the Fund can finance itself, for example, via the emission of CDOs, and thereby bypass the ECB. As a consequence, the euro maintains an optimistic undercurrent. There is an important event risk today: a parliamentary vote in Germany on the changes agreed in July. However, as investors expect the vote to pass, albeit narrowly, we doubt this is enough to spoil the mood.
Thanks to its new-found stability, the euro was able to climb yesterday, but the gains were halted by our first tough hurdle, 1.3690. The prospect remains for additional gains to as high as 1.3815 before lower again. With this in mind, we would open a bearish strategy at 1.3740 with a risk-limit set at the higher point.
Market Bias Index
The US-dollar overvaluation bias eased again yesterday. In the case of the USD/CHF, although the perceived breakeven is all the way down at $0.85, this is the narrowest gap in over three weeks.
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Deutsche Bank
Fixed Income Research – Global