EUR USD (1.2075) The eurozone seemingly re-entered full crisis mode this week. Investor concerns centre not only on the rising debt costs for Spain. Even though the country’s finance minister has tried to reassure investors that a full bail-out will not be necessary, an official call for aid is at least a solution to the problem. More worrying is the growth outlook in the eurozone and in the rest of the world because for this problem there no obvious solution, be it fiscal or monetary. In Greece, for instance, Prime Minister Samaras has indicated that output would shrink 7 percent this year – 50 percent more than previously forecasted. He also predicted no recovery before 2014. In Germany, the combined purchasing managers’ index for services and manufacturing stands at its lowest level since three years. And, in the US, manufacturing is growing at its slowest pace since 2010. At least in the eurozone, it is difficult to see how the mooted monetary measures, like negative deposit rates at the ECB, or fiscal initiatives, like infrastructure spending, will change the growth outlook and with it the debt dynamic. Euro investors have responded to the developments by aggressively buying downside protection in the options market. We do not think this has made a price fall any less likely, though. At best, it will simply slow the decline by removing the element of surprise. We still look for weakness to 1.2010 and then to 1.1860. To the upside, a break of 1.2290 is necessary for a short-term stabilisation.
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Deutsche Bank