EURUSD (1.3955) Investor concerns about peripheral EU debt took a sharp turn for the worse yesterday. Since the weekend, Italy has leapfrogged Greece, Spain and the others to occupy the centre stage. The situation has arguably been worsened by uncertainty in Italian political leadership and by an ongoing meeting of EU finance ministers, which many expect to result in a solution for Greece that rating agencies will label a default. Investors are now well-versed in their responses to emergent sovereign debt woes, which explains the swift market reaction: peripheral bond yield spreads blew out to euro-era extremes and the single-currency declined. However, financial journalists are also well-versed, which explains the immediately grim headlines – far more column inches have been dedicated to illustrating Italy’s similarities to Greece than to its differences. Pimco CEO, El-Erian, was almost alone in drawing attention to the longer maturity profile of Italian debt and to the flexibility of its economy.
The euro decline has, of course, brought it into more vulnerable territory now. It is particularly badly supported ahead of 1.3810, but we do reckon with good demand there as well as at 1.3670. An immediate stabilisation will be very difficult, but an initial positive signal would be given by a break of 1.4065.
Market Bias Index
The broad-based perception of euro undervaluation is just two days old but it has already reached impressive proportions. The perceived break-evens versus the CHF and the USD are at 1.2150 and at 1.4350, respectively.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/07/GDPBD00000187386.pdf
Deutsche Bank
Fixed Income Research – Global