EUR/USD (1.3490) The Italian yields stood at around 7.06 percent on Wednesday even after the market reportedly saw substantial ECB bond-buying. As market talk about contagion reaching the core countries including Germany reached crescendo, the ECB is increasingly not only being seen as a lender-of-last-resort but the amount it can employ to buy the bonds is also now under scrutiny. Some commentators argue that the current treaty does not put any limit on the amount the ECB can employ for sovereign bond buying in secondary markets if it is in pursuit of its inflation objectives. One could reasonably question whether ECB’s bond buying is consistent with its price stability mandate. A glance outside the eurozone shows that policymakers are slashing forecasts for inflation. BoE’s Mervyn King, for example, opened the door to even more QE while forecasting that inflation in UK had peaked and was set to fall significantly. US inflation eased in October and post-QE there remains a relative lack of inflation. It can thus be argued that global inflation is in any case showing a cooling trend. The ECB might just be one inflation forecast away from actually feeling fully justified about delving into forcefulbond-buying.
We still see the euro as vulnerable to a decline to 1.3360/80 and in case of a violation there, a slide to 1.3170. A near-term stabilisation is easier now, but nonetheless requires a move above 1.3780. Interim resistance stands at 1.3560.
Market Bias Index
The JPY continues to be perceived as most overvalued currency versus the EUR. However, the EUR is now generally seen as less undervalued than yesterday.
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Deutsche Bank
Fixed Income Research – Global