EUR USD (1.2375) High Spanish borrowing costs, diving stock markets and concerns about the banking industry again saw investors buying safe-haven assets yesterday. Perhaps that’s why EC’s proposal of a joint bank deposit guarantee scheme, a eurozone wide financial supervision body, and a direct recapitalisation of the banks by the ESM, resonated in the markets. It also prompted a short-lived consolidation in the euro in the 1.2435/65 zone, where the day’s best trading volume was concentrated. The quick rejection of the ESM suggestion by EU’s Olli Rehn on legal grounds, and Germany’s continued opposition to the other suggestions, left the investors rattled. What was left of the day was an EC recommendation for an increase in sales taxes in Spain, even though Madrid has repeatedly pointed out that increasing VAT would hurt already declining household spending. The EU’s offer to extend the Spanish deadline to meet the deficit target rang similarly hollow given that it requires the imposition of ever stringent austerity. Meanwhile on the US front, the record low Treasury yields have prompted at least one Fed dove (Dudley) to say that benefits of further (i.e., more of the same) monetary action are unlikely to exceed the costs. In the US as in the eurozone, the tools for stimulating growth are now a question of political choice. The euro has almost satisfied the downside risk to 1.2350. Below there, the best demand stands at 1.2240/60. To the upside, in addition to yesterday’s high-volume level, an important point is at 1.2595.
Click here to read the full report: Daily forex 05.31.12
Deutsche Bank