EUR USD (1.2285) The euro’s current weak position seems to be largely attributed to the disappointment from the EU summit and higher Spanish yields. Some seem to believe that since the ECB rate cut, euro funding for carry trades are pushing the currency lower. Indeed, all these factors are present and are casting a cloud over the prospects for the currency. But it is also true that euro bears who feared deteriorating eurozone fundamentals have already sold and most likely have short positions. Other technical factors, which lack the novelty of the above, may thus be playing an even greater role. The continued intervention by the SNB and the subsequent diversification of euros into dollars is such a factor. The continuing eurozone crisis also means that the dollar is increasingly in demand as trade currency. The dollar lending shortage is also weighing on the euro. Finally, the ECB’s low rates have meant that US money market funds have restricted access to euro products in order not to dilute the yields of existing shareholders. These factors are only indirectly related to the political debate about the banking union or the success of a bond auction. The euro slide has so far been limited to the 1.2220/40 zone. However, the rebound has been feeble. The (weak) supply at 1.2365/95 is the first hurdle. If this zone manages to cap its recovery, this would reveal just how vulnerable the euro is. We believe that it is anyway slated for further declines, to 1.2150 and then to 1.2010. The latter is the current risk. The best upside hurdle is at 1.2450.
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Deutsche Bank