Focus FX Weekly

18 Octombrie 2011

RAIFFEISEN BANK S.A.

 

EUR/USD

EUR/USD: 1.372 - 1.30 (December)

Last week, the euro appreciated tangibly against the US dollar, strengthening from EUR/USD 1.33 to a peak of EUR/USD 1.39, in the wake of the US economic data (ISM, labour market report) – which many market participants found to be surprisingly good – and the related easing of recession worries, along with some hopes for a solution to the Eurozone debt crisis at next weekend's EU summit (October 22-23). We had pointed out on numerous occasions that the upcoming EU summit will not bring a breakthrough, and thus these expectations were completely overdone. Reality set in yesterday, when the German government made it clear that it does not expect any major breakthrough. To quote German Federal Chancellor Angela Merkel: "Dreams that everything will be solved with a package next Monday and that everything will be done and finished will not come true." Thus, the Eurozone debt crisis will continue to generate more negative headlines in the weeks to come.

Indeed, more dire news came today already, when Moody's announced that it was reviewing the stable outlook on France's AAA rating, due to the country's mounting public debt level. Hence, France may be facing a negative rating outlook in the next three months, and this could be followed quite quickly by a downgrade. This development is logical, as France is the next weak link in the chain. If the announced capitalisation of European banks does materialise, France will likely come under intense pressure, as the funds provided for French banks by the government will cause France's public debt to swell even more.

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