EUR/USD (1.3455) Heartened by better-than-expected US employment data, traders pushed the euro to a short-lived spike on Friday. But the realisation soon settled in that moderate US employment gains look positive as they stem from tepid expectations.
Late Friday afternoon Fitch downgrades of Italian and Spanish debt and several European banks had markets once again focussed on the mood and activities surrounding the Franco-German negotiations to recapitalise banks. On Sunday, Merkel and Sarkozy announced that, end-October, a comprehensive package to stabilise the eurozone will be delivered. The well-intentioned announcement has strengthened the market impression that Greece is now being prepared for orderly default, a development which German Vice Chancellor Rosler described as ‘resolvency’. Markets are now waiting to see how politicians and banks will hard-sell the 60 per cent haircut figure on Greek debt that is currently doing the rounds, but investors generally like the idea that the end-game is near.
In our view the euro will still not achieve stabilisation until the 1.3600 hurdle is overcome. To the downside, demand has likely improved at 1.3310 and a failure there would probably see the euro sliding again. The broader risk remains for weakness to as low as 1.2910/60.
Market Bias Index
The dollar bias (perception of overvaluation) hardly moved compared to Friday’s. The exception is that versus the pound, which has retreated slightly towards its 1.5750 breakeven.
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Deutsche Bank
Fixed Income Research – Global