EUR USD (1.3115) An apprehensive eye will be kept on the Spanish 10-year bond auction today as stress on the eurozone persists from the periphery. Statistics from Spain, such as the 3 percent decline in house prices in the last quarter and the 17-year high in bad debt on the country’s bank’s balance sheets keep investors weary. The IMF’s Global Stability Report yesterday also raises questions of urgency for EU restructuring. The report forecasts that European bank balance sheets will drastically contract in the coming 18 months, hindering prospects for a return to normal economic growth. Suggestions of more ECB easing are included, hence buying time for reforms. We believe not all easing action will have such beneficial consequences. Should the ECB offer further LTROs, banks may be less willing to accept due to haircut constraints on collateral – some banks are reportedly ready to repay past LTRO money early. Should the ECB lower rates, it might be more of a symbolic gesture as the eurozone economy, which has anyway low sensitivity to rate changes, is deleveraging. So it seems, the ECB may have little choice but to revert to outright bond purchases (sooner, rather than trying to contain a worse situation later). The Spanish bond auction today should, therefore, be of considerably less worry. The euro remains rangebound and immune to much news. As before, so long as it trades below the stabilisation point at 1.3235, the risk of decline to 1.2805 remains.
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Deutsche Bank