EUR USD (1.2965) Television cameras were in the debt management office of the French Treasury during yesterday’s auction of five-year paper. The managers struggled to control their delight at the robust demand and at the yields, which were almost 100bp lower than last November. The picture was probably similar in Spain. Indeed, since last Friday’s S&P downgrade, eurozone sovereign yields have tended to fall, eurozone stock indices have risen, and the single currency has climbed almost three percent. It is almost as if investors perceived the S&P warning as a kind of ‘kitchen sink’: they knew that downgrades were in the pipeline but did not know which country and by how many notches. If S&P went to the trouble of re-rating nine countries all in one go, they would be unlikely to show up with further bad news in dribs and drabs. This, however, is the hindsight view, not the opinion expressed by traders in the aftermath of the downgrade. Despite the popular perception of huge short positions in the market, short-term traders apparently had no real appetite to buy the euro. Now that it is higher and the implied volatility is still in the basement, even the short squeeze argument pales, so they may still be unwilling to buy. The current buyers are more likely of a longer-term nature.
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Deutsche Bank