EUR/USD (1.4225) The effects of the Fed’s 2-year pre-commitment to exceptionally low federal funds rates began to wane yesterday after only one day of relief. Traders spoke of banks’ exposure to Greek debt as the reason for another equity market sell-off. In France, where concerns for the banks were exceptionally strong, there was widespread talk yesterday that the country would be the next to lose its AAA sovereign debt rating. Although Fitch, Moody’s and S&P all dismissed the accusations, their denials were not enough to calm the market; the CAC 40 Index lost 5.5 percent. However, as the US Treasury market still demonstrates, market participants care more about prospects for growth than they do about credit downgrades. Indeed, the yield on 10-year US paper dipped beneath 2.1 percent yesterday. Given that, the national statistics office reported yesterday that French industrial production fell by 1.6 percent, a full percentage point below economists’ expectations. The country’s growth prospects will no doubt be hampered further if the French president gets his way. Mr Sarkozy announced a ‘general mobilisation’ yesterday, giving government officials one week to organise drastic austerity measures. As we have suggested many times before, everyone cannot embark on budget savings programmes concurrently without choking growth.
As long as the single-currency remains above support at 1.4135 it has a chance to recover to 1.4415 or even to 1.4550, the bullish acceleration point The key support for this outlook lies at 1.4050.
Market Bias Index
The Market Bias Index is scarcely changed today. The Swiss franc remains extremely overvalued in traders’ perceptions. The comparatively slight bias in the yen reflects traders’ anticipation of a JPY intervention.
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Deutsche Bank
Fixed Income Research – Global