EUR USD (1.2925) Investors continue to focus their angst on the European bond markets. Yesterday’s German bund auction although oversubscribed and better than the preceding one in November, was largely rated by the market as ‘lacklustre’ or ‘muted’. Since, typically, the bund issue is keenly priced relative to the secondary market, a demand less than the five-year average (at yields well below the fiveyear average) may not necessarily indicate a waning faith in the German economy. Nevertheless, the nervous markets tend to see it as a signal for potential tepid demand for the upcoming debt sales from France, Italy and Spain. Yesterday’s announcement by the Spanish government that Spain’s banks may have to put aside €50 billion in new provisions for bad property assets has refuelled worries about bank funding. Thanks to easing inflation pressures in eurozone, market expectations are on the rise that the ECB may have more room for interest rate cuts. However, on this front too investors may be setting themselves up for disappointment. With EU embargo on Iranian oil looming and, of course, the weak euro, some of the advantage of base effects on inflation could be undone.
We continue to see the euro at risk of a drift to 1.2675. In best case, it could just consolidate for a while longer above 1.2860. Resistances are at 1.3140 and 1.3200 (neutrality point).
Market Bias Index TM
The market perception of EUR as undervalued has intensified, especially against CAD, JPY and AUD. The bias against USD, however, is more moderate, although more than yesterday.