EUR USD (1.3150) Yesterday’s drop was not only due to dollar strength, but also to considerable euro weakness. Investors continued to buy dollars, supposedly pricing in the opinion that there will be no more Fed QE. The more hawkish interpretation of the FOMC minutes was, as we mentioned yesterday, something of an overreaction given how little has changed. In another vein, the eurozone was perceived more gloomily after a poor Spanish bond auction. This caused a 24bp jump in 10-year yields as the country remains constrained by budget cuts and growth problems. The euro bottomed during the ECB press conference, although this might have been purely coincidental. Draghi was not only dovish, but he showed himself not to be the type to communicate policy through small text modifications or code-words, like his predecessor. So, here too, there was something of an over-reaction on the part of journalists. As far as the Spanish bond auction was concerned, some theorised that it was due to Spanish banks running out of LTRO money and not being able to buy government bonds. Even if this is the case and LTRO liquidity in the periphery merely suffices to cover deposits lost to banks in the core (for example, in Finland, Germany and Luxembourg, the main depositors at the ECB facility), the LTRO will still have beneficiaries; the entire eurozone can hardly be painted so black, in our view. The euro has already satisfied the very modest downside risk to 1.3110. To the upside, the level 1.3340, where much of Tuesday’s trading volume was concentrated, remains a tough hurdle.
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Deutsche Bank