EUR USD (1.3070) Weak US data dented the markets’ ‘risk-on’ mode, but did not provoke any meaningful dollar recovery. The euro, however, slid across the board. The delay in the finalisation of the Greek debt restructuring deal is likely weighing on the market. The suggestion that the ECB take a haircut on its holdings of Greek paper, which has been in the market for weeks, probably reached such an extreme that the IMF had to deny that it was expecting ECB participation. However, each mention of haircuts reinforces the reference point perceived in the markets as far as debt is concerned. At the start 2011 the political insistence was that Greece would not default in the traditional sense. Now, if both public and private debt holders are to be involved, the perception that the solution to the Greek crisis might move away from the ‘voluntary model’ begins to occupy the centre stage. The same applies to Portugal. The cost of insuring its debt has reached a new record, so investors clearly have similar concerns about restructuring. Even though the Portuguese prime minister rules out haircuts, its mere mention causes it to enter the collective psyche – it too becomes a market reference point. Yesterday, euro’s pullback brought to a close our latest bullish strategy. At the moment the risk-reward concerns prevent us re-engaging on the bullish side, although we still see potential to 1.3285. Good supports are at 1.3005 and at 1.2920.
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Deutsche Bank