EUR/USD (1.3825) The Italian PM Berlusconi has agreed to resign as soon as the Parliament passes the austerity measures pledged to the EU. It seems that transitional technocratic government is coming in Italy and probably in Greece too. They are seen by markets as more capable of passing the reforms that their predecessors could not. Probably these coalitions will make eurozone-level decision-making more durable, or so the markets believe. Interestingly these same developments are not seen as growth-inducing or stabilising by others. Mark Carney, the new chairman of the Financial Stability Board, the international association of regulators has warned that eurozone stresses are creating a wave of global instability by sucking liquidity out of the markets. The current financial volatility, the Board fears would soon start dragging down global growth. Harvard professor Kenneth Rogoff is staggered by what he considers to be a euro overvaluation against the dollar. A poorly-conceived EFSF and the reluctance of core European governments to recapitalise peripheral European economies will ultimately engender a bigger crisis which will drag the euro down, he concludes. The above divergent views seem to be reflected in the European markets where equities and oil are rallying along with the safe-haven gold, but the euro is unchanged.
We continue to see a downside risk for euro to 1.3510 as long as 1.3875 is not overtaken. However, even in the case of an upside exit, tough upside hurdles remain at 1.3940 and 1.4025.
Market Bias Index
The perceived undervaluation of the CHF, which leapt at the start of the week, is already starting to evaporate.
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Deutsche Bank
Fixed Income Research – Global