EUR USD (1.3030) Better-than-expected data from China, Germany and the USA probably helped to boost equity markets yesterday. The euro, which had just four trading days ago suffered an 11-month low (1.2860), rebound. Whether inspired by the ‘risk-on’ equity markets, by a January rebalancing of portfolios that required dollar selling, or by
news of record short euro positions in the latest CFTC data, some commentators attributed the euro’s rise to a short squeeze. This is probably not correct. The rally has so far only managed to recapture the ground lost in the final days of 2011, a period where liquidity is typically low. In any case, it is doubtful whether this surprisingly
positive start to the new year will outlive persistent media reports of a potential eurozone breakup. Engaged in negotiations over the terms of its second bailout, Greece’s government warned yesterday that it could be forced to abandon the euro. While the warning could well reflect the government’s dilemma in implementing unpopular austerity
measures, the market perception of the risk that Greece might actually leave the eurozone has hardly altered. But the markets are focussed on how the larger indebted countries like Italy, Spain and France, and for that matter the EFSF, will raise new money in the current environment. While it remains below our stability point of 1.3200, we continue to
see the euro at risk of a drift to 1.2810 and, below, to 1.2675/710
