EUR/USD (1.3460) The impressive rally in equities yesterday was a clear reaction to the coordinated global intervention by central banks to lower dollar swap costs. The announcement followed a Chinese move to lower the reserve ratio requirement by 50bp, and preceded a better-than-expected Chicago PMI, so the market had almost a surfeit of positive headlines which spurred risk appetite despite conflicting signals about banks downgrades and wage declines in the US. The impressive step by central banks to address at least the most immediate funding challenges does convey to the market that they have finally acted with the required sense of urgency and are seeking ways to keep the eurozone together. The fact remains however, that the action has more the nature of an emergency brake which was required to reopen the eurozone’s choked credit lines. In market’s perception, perhaps the central banks’ decisive move has raised the bar for the politicians to deliver a sustainable solution for the solvency problem in eurozone. The market will now dare to aspire again and any news about future solutions will be measured against the impact of yesterday’s fortunate combination of events. In any case even this optimal news day failed to push the euro back onto stable territory, as it turned ahead of the key 1.3575 hurdle. We continue to focus on the downside until this threshold is overcome and expect a test of 1.3170. In consolation, demand ought to have improved at 1.3360 as a result of yesterday’s development.
Market Bias Index
At its best point, the EUR/USD probably touched its perceived breakeven. The central bank move has, however, pushed the CAD and the AUD to a perceived overvaluation versus the USD.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/12/dailyforex_20111201.pdf
Deutsche Bank
Fixed Income Research – Global