EUR/USD (1.3545) Scores of economic commentators including Krugman, Nouriel and Wolf are thinking aloud about what the latter calls the ‘unthinkable’: the break-up of the eurozone.
The vicious circle – rising bond yields, forced austerity, falling growth, deteriorating debt outlook, rising bond yields – is repeating itself in one country after another. Just yesterday, the European Commission (EC) downgraded its 2012 eurozone growth forecast from 1.8 percent to just 0.5 percent. Its expectation for France is just 0.6 percent, which is much lower than the government’s 1.0 percent. Some private economists even predict contraction for France now. Yet the EC is also insisting on greater austerity from the French Government beyond that already announced this week. Investors recognise the pattern and extrapolate to the same conclusion as the economists. They see the ECB as the only body that can cap the rising bond yields and stop the cycle. Purists argue that printing money to make sovereign debt purchases on the required scale are beyond the Bank’s mandate and would risk turning it into ‘bad bank’. However, Europe remains a zone of considerable wealth. If the ECB finds it inappropriate to act without collateral, it is perhaps the moment to bring sovereign assets into play as a backstop.
We have now extended the downside risk for the single-currency to 1.3380. To the upside, the very first notable supply point is 1.3715.
Market Bias Index
Despite the volatile price action of recent weeks, markets seem unable to distance themselves from perceived fair-value for more than a few days. Relative to yesterday, biases have narrowed across the board.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/11/dfo20111111.pdf
Deutsche Bank
Fixed Income Research – Global