A Look At The Week Ahead
Another week sees another round trip between recent range highs and lows for the USD against many other major currencies. Since the beginning of December, EUR/USD has been effectively contained in a 1.30-1.35 range, with this weekâ€™s test below the range bottom having proved unsustainable. The euroâ€™s subsequent rebound to above 1.3400 looks similarly unsustainable in the short-term, but a further upside test of recent range highs and above 1.3500 seems likely as long as European credit markets continue to mend.
We would note the regular monthly meeting of EU finance ministers next week has the potential to generate more positive news flow over the prospects for a permanent debt crisis resolution mechanism, potentially offering a fundamental catalyst to send the EUR higher (see more below). However, there is also potential for disappointment on this front and we would note comments from German Fin. Min. Schaeuble on Friday where he repeated Germanyâ€™s opposition to so-called euro-bonds, the most viable long-term resolution to the debt crisis.
For this reason, we would prefer to use EUR strength on a test and potential break of recent range highs as an opportunity to establish short EUR/USD positions in the 1.3450-1.3650 area for an expected medium-term decline. We still think additional bailouts will be required down the road and that sovereign debt restructuring (i.e. defaults) will ultimately come to pass for several of the peripheral countries.