EUR/USD (1.3810) The euro and the equity markets moved up on the Guardian’s Tuesday evening report that France and Germany have agreed to boost EFSF to two trillion euros. Germany’s Finance Minister Schauble’s comments later that EFSF will expand to a maximum 1 trillion, although confusing, give an impression that eurozone politicians are at least on the way to carving out a structural solution to debt crisis. The traders, of course, have not shrugged off the spectre of Moody’s warning that it may downgrade France’s critical triple A rating. Moody’s cites concerns about France’s already existing commitment to EFSF, the prospect of bank recapitalisation costs, and the chances of growth undershooting current 1.75% forecasts as reasons for the outlook. Traders used the Moody’s news to justify yesterday’s weakness, even though the news release was on Monday. Yet, curiously, the Guardian article (subsequently denied by an EU source) is seen as positive even though the solution described would do little to improve France’s debt situation. It may reduce market uncertainty and possibly improve the French growth outlook, but the leverage involved would make it likelier that the French guarantee would become a genuine expense.
Although yesterday it briefly broke our downside risk-limit yesterday, the euro continues to march upwards. Above 1.3885, it may even gain momentum in a climb to 1.4060. Good support now waits at 1.3635.
Market Bias Index
Traders continue to perceive Australian dollar as overvalued and the bias is now one week old. The AUD/USD almost touched its fair-value 1.0115 yesterday. The corresponding point for EUR/AUD is at 1.3600.
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Deutsche Bank
Fixed Income Research – Global