EUR/USD (1.3860) Given the brisk resuscitation of the European stock indices – no less than 12 percent in three days for the German blue chips – it is tempting to think that the preceding sell-off in equities and in the euro was overdone, that the market had again displayed its tendency to over-react. Indeed, in our previous report, we described at length commentators’ preference for euro-bearish news stories even though there had been no material worsening in the debt crisis situation. Yesterday, at the latest, such views became untenable, at least in the near-term. The decision by the world’s major central banks to inject three-month dollar liquidity into the European markets boosted bank stocks and hoisted the euro higher. The stranded bears were left to re-evaluate the likely impact of the Italy situation or the throwback from the news of a large trading loss by a rogue trader. Yet, this alone is not proof of an over-reaction to the downside. The central bank policy response would not have taken place had there not first been a dollar funding crunch. Similarly, as the WSJ reports, the corporate customers of some French banks would not be seeking financing at non-European institutions had there not first been the sharp stock price falls and the Moody’s downgrade. Both reactions – down and then up – could have been correct.
The stability that the euro managed to achieve yesterday, offers further recovery potential to 1.4040. Euro pessimists, who hesitated to cover their positions yesterday, are expected to emerge at 1.3785.
Market Bias Index
All of the perceived biases shrank yesterday. Just the Swiss franc remains striking. Against the greenback, the euro’s perceived fair value is only less than two percent away.
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Deutsche Bank
Fixed Income Research – Global