EUR USD (1.2675) Reports suggesting that the Italian PM has floated the idea of using the EFSF to purchase the peripheral bonds were followed quickly by those suggesting Germany’s non-committal approach to the idea. Lately Mario Monti has been very vocal about the costs that Italy has to tolerate in order to support other nations like Spain; he complains that his country has to pay double. This is because Italy currently has to borrow at about twice the rate at which it subsequently is set to lend to Spain in the latest bank bailout. Its gesture of solidarity means it has to dip into its thinly-lined pockets to support its neighbour. Germany, on the other hand, borrows at approximately half the rate at which it then disburses bailout funds. So the fiscal transfers that are so urgently needed from stronger core nations to weaker peripheral countries are effectively taking place in the opposite direction. It is a reversal of this flow that EU leaders like Monti and French President Hollande currently seek. The latter reiterated yesterday that the rates at which Spain and Italy borrow from the debt markets are ‘unacceptable’. The market appears to be seeking the same reversal of transfers. The euro’s attempt at recovery will only bring sizeable gains if it is able to climb above 1.2840. Critical support is at 1.2505 and, below there, the euro would move back onto vulnerable terrain.
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Deutsche Bank