EUR USD (1.2830) Several surveys of investor expectations seem to indicate that many increasingly see at least one country exiting the eurozone in the next 12 months. Of course last week’s post-election impasse in Greece is one of the factors that have caused probability estimates to tick upwards. Although the flow of news was negative yesterday – Moody’s downgraded 26 Italian banks, European production data was uninspiring and Spain saw yields surge following an auction – at least the worst-case scenario for the eurozone came no nearer. Perhaps aware that the market is once again acutely sensitive of the banking system weakness in the periphery and thus on the verge of punishing peripheral bonds once again, the Luxembourg PM Juncker hinted at giving Greece extra time to meet budget deficit targets if the country manages to put together a functioning government. Also Portugal made a small step towards increasing its competitiveness by scrapping four annual public holidays and having workers cede a further three days of holiday entitlements. This is the equivalent of a pay-cut, of course but, from a psychologically perspective, it is much more palatable so less likely to provoke opposition. The euro remains in a correctional mode. We still anticipate further weakness to 1.2805 (almost reached yesterday) or even to 1.2660. Only above 1.3095 would we expect some stability. An earlier upside hurdle stands at 1.2920.
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Deutsche Bank