EUR USD (1.2465) Spanish bond yields are again hovering near the seven percent levels which make it difficult for the government to plan any sustainable borrowing. The Spanish plan to recapitalise Bankia through an equity-bond swap also becomes more expensive and the idea has found little resonance with the ECB. Governing Council member, Nowotny, made it clear yesterday that recapitalising banks does not fall within the ECB’s mandate. The other option proposed by the Spanish government is to recapitalise Bankia directly through the ESM, but this also has yet to find enough supporters especially in the core countries. While a draft of a new EC law mulls a cross border bank rescue fund, it is unlikely to come into effect before 2014. In short, there appears to be no immediately implementable alternative. The current impasse in the eurozone came as a surprise to the markets, at least as far as the size of the bad Spanish property loans is concerned. Hence, the pressure on the euro and on the Spanish bonds looks justifiable. Although there was a preponderance of short EUR/USD positions already in the market, most likely the near-term bears took profits too early, or had not sold enough. As a result, the implied volatility remains high and we expect resellers on any recovery up to 1.2690, our stability point. The long term euro outflow, however, is likely to contribute to a further drift towards 1.2350 and below that even to 1.2240.
Click here to read the full report: Daily forex 05.30.12
Deutsche Bank