EUR/USD (1.3725) Leveraging the EFSF to stem debt contagion involves potential political and economic costs which are the point of contention at the EU weekend summit. While France supports the idea of turning EFSF into a bank that could tap the ECB, Germany endorses enabling the EFSF to insure a part of peripheral euro debt. Whatever the mechanism, the markets perceive the two trillion euro figure as an anchor, the amount required to halt the contagion. Germany’s Financial Minister Schauble is standing behind a one trillion figure. So, a weekend announcement could be a compromise number somewhere in the middle. This would certainly be a huge step forward and investors would welcome it. However, it might not achieve the previously stated objective of convincing markets of a definitive end to the debt crisis. Two more headlines are also weighing on the market: a Wall Street Journal report claiming that the EFSF lawyers oppose leveraging, and the Financial Times stating that bank recapitalisation costs will amount to less than €100bn compared to IMF’s €200bn number. The history of the crisis, however, has shown that legal hurdles can be overcome and that stress tests are not without their shortcomings. The market interpretation of these headlines may be the inverse to how they appear at first glance. We currently expect a sideways development between 1.3635 and 1.3885. Only beyond these borders would we gain any new insight.
Market Bias Index
EUR/USD continues to move around its fair-value on the Bias Index. The Swiss Franc continues to be perceived as undervalued and AUD looks slightly overvalued.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/10/GDPBD00000195896.pdf
Deutsche Bank
Fixed Income Research – Global