EUR/USD (1.3805) Market commentators are using the promise by the Slovak opposition to vote in favour for the EFSF as an explanation for the huge risk appetite in the markets yesterday. This is puzzling, as no one ever doubted it. Yet, equity market strength, for example the German benchmark is ten percent higher in just the last week, has had a powerful impact on investors’ perception of the eurozone debt crisis. Whereas a week ago, commentators were deeply critical of the EU17 decision-making process. They bemoaned its tardiness and its tendency to unpick previous agreements. Now with stocks sharply higher, the criticism has mellowed: investors now believe that politicians are on the right track and that the yet to be announced Merkel-Sarkozy plan will succeed. In short, they have inferred from the higher stock prices that the end of the crisis is closer, even though the debt situation in the peripheral states has barely changed. If policymakers can so easily and quickly buy market favour and, importantly, time with a ten percent stock market rally, one has to consider it a reasonable policy objective.
The euro has satisfied the upside potential we described yesterday. However, traders’ inability to explain the move reflects the lack of preparedness for it and suggests that a bullish pursuit is likely. In case of a dip to 1.3760 we would try a bullish strategy, for a target at 1.4150, with a risk-limit set at 1.3680.
Market Bias Index
The popular perception of the euro has switched from one of undervaluation to one of overvaluation. The bias is generally small, new, and has one notable exception – the EUR/AUD.
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http://www.easyforexnews.net/wp-content/uploads/2011/10/GDPBD00000195290.pdf
Deutsche Bank
Fixed Income Research – Global