EUR USD (1.3175) Although the euro has now completed a fortnight of impressive strength, traders can find little positive to say about it. In the headlines are, for example, the rising Portuguese yields, which reportedly indicate that investors are getting nervous about the losses they might have to take if Portugal gets the second bailout. Similarly, although some EU officials say that an agreement on a 70 percent haircut has been reached in Greek PSI negotiations, the remaining Greek budget shortfall remains controversial. The German IFO institute has calculated that, over time, Germany’s exposure to eurozone bailouts may increase to €635 billion. This gives arguments to those who oppose Germany’s contribution to pan-European rescue vehicles. The furore about an outside budget overseer for Greece and Fitch adding its stamp on eurozone downgrades has also left investors wondering how much closer the eurozone really is to resolving its crisis. Traders even saw the weaker-than-expected US Q4 GDP as a bearish argument for the euro and promptly sold it down 50-pips. However, as with every selling attempt in the last two weeks, this one too ended in a short squeeze. The only dollar negative traders saw last week was the prospect for Fed QE3 and, as we noted, there was a tendency to downplay that. So the market still struggles to come to grips with the euro rally, which is encouraging for our bullish view. Our price target of 1.3285 remains intact, although we now raise the downside risk-limit to 1.3075.
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Deutsche Bank