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Foreign Exchange

FX research roundup: Is that it for the EUR/USD bounce?

At the start of the week it was interesting to note the differing views of the EU’s assistance programme for Greece and the resultant bounce in EUR/USD to just shy of 1.3700.

BNP Paribas largely saw the bounce as a selling opportunity but was holding off for a little more EUR/USD strength. The French bank quoted the IMF ex-chief economist’s prediction of an explosion of Greek debt levels to 150% of GDP and summarised with “the fact that EUR qualifies as a funding currency and offers little incentive as an investment tool suggests the current EUR/USD rebound will run out of steam before our 1.3860 target.”

BNY Mellon saw the relief rally in similar terms. EUR/USD “could still have a little way to run (the technicals suggest a target around 1.3900)” but “the longer-term trend for the EUR must still be lower.” BNY Mellon chose to quote Dominique Strauss-Kahn on Greece’s debt problems: “The only effective remedy that remains is deflation...And this is exactly what the European Commission has correctly recommended.”

More optimistic in tone were the analysts at RZB anticipating a “strong countermove”. However, the Austrian bank was of the view that a large part of this had already occurred by Monday morning and pointed to a “rebound towards 1.4000, if Greece’s upcoming financing efforts go smoothly.”

Tuesday’s 26- and 52-week bill auction went through smoothly enough but on Thursday came rumours that the proposed USD-denominated bond auction would be pulled. BNY Mellon had quoted a Dow Jones newswire as saying that Greece had hoped “to sell a significant proportion of these bonds to PIMCO”. Perhaps PIMCO was cooling on the idea, or perhaps not – the Greeks were insisting that the US bond road-show, if not the issuance itself, was still going ahead.

And then came Greece’s request for official talks with the EU and the IMF – presumably to clarify the bailout mechanism in preparation to taking it up. The talks start Monday but the prospect of a legal challenge within Germany to the subsidised aid (led, I must point out, by a Professor Starbatty) still puts the reality of the package in doubt. Greek/German yield spreads continue to widen; at the very least it looks like momentum to the EUR upside has now dissipated.

Finally, Simon Derrick at BNY Mellon this morning has alerted that: “The WSJ quotes a study to be published in coming weeks by the Washington-based Brookings Institution that says that “bribery, patronage and other public corruption” deprive Greece each year of the equivalent of at least 8% of its gross domestic product, or more than EUR 20 Bn.” It will be interesting to see how the Greeks will make that the fault of the Germans as well.

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