Focus FX Currency Forecast for March 2011

11 Ianuarie 2011

RAIFFEISEN BANK S.A.

 

EUR/USD: 1.293 - 1.25 (next move)

As we forecasted at the end of last year, the sovereign debt crisis in the euro area is coming to a head again. Hardly surprisingly, the centre of attention is Portugal this time. At the weekend, there were rumours that Germany and France were pressuring Portugal to fall back on the EU safety net, like Greece and Ireland before them. Although this was denied by Berlin and by the EU Commission, the markets are rapidly losing confidence. As a result, yields on Portuguese government bonds continued to rise and the euro dipped to below EUR/USD 1.29 at times. The spread on 10-year Portuguese bonds over German Bunds rose to almost 430bp at the peaks. According to traders, the ECB then stepped in to buy Portuguese bonds and thus brought the spread back down to 416bp. These developments bode ill with an eye to tomorrow's scheduled events, when the Portuguese government will be trying to place up to EUR 1.25 bn in 3-year and 9-year bonds. Last week, an auction of 6-month Treasury bills was only able to be placed at an enormously high yields of almost 3%, and thus we remain very sceptical about the outlook for tomorrow as well. While the Portuguese government continues to decline any help, the speed at which the situation can change is aptly illustrated by the example of Ireland. Consequently, we expect that Portugal will be applying to the EU and IMF for a bail-out this month. In this relation, yesterday's comments of the Spanish government expressing once again its confidence that Portugal will not need any EU assistance sound like whistling in the dark. One look at the issuing schedule quickly reveals the reason for such displays of confidence: because one day later, on Thursday, Spain and Italy will also be tapping the bond markets. And their prospects for success will depend greatly on the outcome of tomorrow’s Portuguese auction. In any case, the euro should remain under pressure for now.

Trading ideas

Note: This list contains only the strongest trading ideas for the markets that we cover. Therefore not every market forecast that implies a buy recommendation is also listed as a trading idea! Trading ideas may also differ from our quarterly forecasts. as the time horizon can be different. The time horizon of the trade is at least two weeks, but not more than 3 months.

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