EUR USD (1.2605) The market’s positive response to the Greek election result was short-lived. Even as Greek political parties send signals that they would like to renegotiate their fiscal targets, the market focus has shifted to Spanish banks whose non-performing loan ratio continues to deteriorate. Bonds yields are thus rising. The high yields indicate that only a comprehensive solution to the crisis would likely calm investors. In this context the concept of eurobills seems to be gaining credence, at least among the investors. Firstly, eurobills can be used to quickly collect some low-cost funding. Secondly, there are suggestions they may be able to avoid the treaty constraints or objections from the German constitutional court. From a behavioural perspective, a eurobill precedent can more easily light the path for politicians and officials to longer-dated eurobonds. For investors too, short-term paper is usually safer than long-term bonds, even in the case of a sovereign default. Finally, the moral hazard issue which is held as an objection to eurobonds is also less present; in case of deterioration of fundamentals, investors can punish the next auction. Euro investors seem to have learned that ‘good-news’ rallies have to be quickly exploited since they have a short life span, hence the euro’s turnaround yesterday. Counter-intuitively this should make further recovery attempts easier, as there are now fewer euros to be sold. Still, the euro will only make sizeable gains above 1.2840. An interim resistance is at 1.2645. Critical support is at 1.2505.
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Deutsche Bank