EUR USD (1.2540) Cyprus has officially become the fifth country in the eurozone to ask for a bailout and investors are again demanding higher risk premiums for investing in Spanish bonds. Aware that the Italian sovereign debt is not too far behind, Italy’s technocratic PM is reiterating once again that the impending EU summit must deliver a blueprint for action. As if on cue a Financial Times report suggests that the top EU officials are working on a proposal where the EU will gain authority to impose rewriting of national budgets in case countries fail to hold up the deficit and debt rules. The proposal appears to be very near to the German stance of tough budgetary controls preceding debt mutualisation. However, the news about the proposal is accompanied by comments by German Chancellor describing common eurozone bonds as ‘economically wrong and ‘counterproductive’. The markets, this time around, seemed resigned to policy inertia at the upcoming summit. There is not even a glimmer of hope in investor discussions. Headlines which hint of policy impasse, are hardly able to sour sentiment any further. As we noted yesterday, we believe medium-term, real-money investors already ditched euros, which leaves them mentally ‘free’ to contemplate worst-case scenarios. For now the euro remains wedged in a 1.2435 – 1.2740 congestion zone. Additional market scepticism might even lead to a false break on the downside. This exit should not go further than 1.2360 before turning around.
Click here to read the full report: Daily Forex 06.26.12
Deutsche Bank