EUR USD (1.2945) Fifty-seven percent of 1253 analysts and traders polled in a Bloomberg survey believe one country will exit eurozone by the end of the year. We reckon that more than anything else what the poll really implies is that in the absence of an explicit monetary transfer mechanism, the union is likely to hobble from one crisis to another. The euro’s current weakness is being partly blamed on the denouncement of the austerity programmes by the Greek left-wing radicals. That said, it is not clear that a national unity government or new elections would deliver a negotiating partner less desirous of direct transfers. Keen to avoid complicating the situation even further, the EFSF has agreed to release the next tranche of the bailout, but this is not a transfer. Default involves a transfer, of course, but other means, e.g., eurobonds, have so far been ruled out. One potential means is being contemplated by the Bundesbank, namely the concession of higher inflation in core countries, matched by greater competitiveness in the periphery. However, even if policies succeed in securing a new inflation level, it only creates the preconditions that would favour production in the periphery; it does not guarantee that any will take place. In any case, the transfer would take years. The news headlines suggest that action is more urgent than that. The euro retreated yesterday to the lowest levels since January and is now vulnerable to a slide to 1.2805 or even to 1.2660. The euro would get some relief now only above 1.3095.
Click here to read the full report: Daily forex 05.10.12
Deutsche Bank