EUR/USD (1.3405) Eurozone leaders were in the unusual situation of not having to dwell on the problems of other nations at the annual IMF meeting in Washington; they had to discuss their own. Of the solutions that have been reported, one of the most radical is a Franco-German plan to recapitalise eurozone banks with tens of billions of euros, and for the EFSF to leverage funds from the ECB to provide some EUR2,000bn to cope with Italy’s and Spain’s financing woes. This way, leaders would not have to seek approval from their parliaments for the significantly greater bailout resources. The IMF has already said that it might not have enough money to bail out a large eurozone nation, so the means of the EFSF would need to be substantial. The plan would not necessarily preclude any default, but at least no country would need to leave the eurozone, nor would the zone have to rely on external support from China or elsewhere. The plan has prompted a great deal of market discussion but, as nothing was agreed in Washington, the euro, which rebound a little on Friday, was met with renewed selling this morning.
We still consider 1.3360 to be the initial downside risk for the euro, but we no longer dare hope for a bottom there. A better chance is available in the 1.3210/60 zone. To the upside, an immediate stabilisation is probably out of reach. However, the downtrend is not a one-way street if the euro manages to overtake 1.3595.
Market Bias Index
The perceived overvaluation of the USD – with the striking exception of yen pair – continues to expand. This pattern has already been in place, albeit at a lesser degree, for a fortnight.
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Deutsche Bank
Fixed Income Research – Global