EUR/USD (1.3920) The euro slid yesterday on the news that today’s planned meeting of the EU finance ministers had been cancelled and that EU leaders played down prospects of a final plan emerging anytime soon. However, the subsequent euro recovery only suggests that even the most optimistic investors had not really expected a ‘comprehensive package’ to emerge. Chastened by over a dozen ‘crisis meetings’ that have taken place over the last 21 months, according to a Bloomberg calculation, investors seem to have kept their optimism on a very short leash. The expectations are nonetheless for Chancellor Merkel to get the leveraged EFSF accepted by the German parliament, including a cap on guarantees by this afternoon. Her vocal opposition to a phrase in a draft communique which implies that ECB should continue buying peripheral bonds in the secondary market is only one of the many signals of discord which are likely to emerge from the future EU meetings. Investors probably would not become too unsettled if they are informed about a leveraged EFSF figure at least in the €800bn to €1000bn range and a Greek haircut percentage in line with German wishes. A hugely revamped EFSF model or an SPV structure is not expected by a broad number of observers. As a result, we do not expect too many hurdles to a continued euro recovery. We still see a potential for a rally to 1.4060 and beyond this to 1.4210. To the downside one should note, however, that first good support is only down at 1.3780.
Market Bias Index
The Market Bias Index shows that the Australian dollar continues to be perceived as the most overvalued currency but the bias has decreased compared to yesterday.
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http://www.easyforexnews.net/wp-content/uploads/2011/10/GDPBD00000196485.pdf
Deutsche Bank
Fixed Income Research – Global