EUR USD (1.4170) The euro suffered its largest fall in more than a month yesterday as eurozone leaders failed to come to an agreement on the shared costs of a new Greek bailout. ECB Vice-President Constancio admitted that some sort of debt rollover might be arranged, indicating an alignment with Germany’s suggestions, but that any agreement must avoid creating a credit event. However Luxembourg Finance Minister Luc Frieden said the talks may drag on into July, adding to the EUR/USD’s turmoil. Meanwhile in Greece, against the backdrop of unrest in the streets, Prime Minister Papandreou proposed to step down after forming a national unity government. The opposition declined the gesture, apparently unwilling to agree to a new set of austerity measures. As such, we believe dissolution of the present government won’t necessarily improve the situation.
Already yesterday morning, traders were reportedly scrambling for EUR/USD put options, and the demand prompted the largest spike in one-month implied volatility of the entire year. If the dollar is truly a better alternative remains to be seen, but the immediacy of the Greek situation effectively trumped the release of some negative US economic data yesterday. A failure of the 1.4235 level opened the downside for losses to 1.4010, and the risk will remain unless it can climb above the 1.4310 level today.
Market Bias Index
Yesterday’s broad euro weakness had an immediate, if only moderate, effect on the Market Bias Index. The single-currency is now likely perceived as undervalued against all of the other majors.
Deutsche Bank
Fixed Income Research – Global