FXstreet.com (Barcelona) - Commerzbank analysts explained the negative correlation between the EUR/USD and the German CDS (i.e. the cost for an insurance against the default of German government bonds) following the summit in October 2011 as the Euro leaders decided the higher haircut in Greece and to leverage the EFSF: “If Germany over-exerts itself financially so that Bunds would no longer act as a safe haven cautious investors would have to leave the euro”, wrote analyst Lutz Karpowitz.

However, that negative correlation is no longer visible since the June summit, as Euro leaders decided to provide direct banking financing through the ESM and less stringent conditions for EFSF and ESM aid, and that might be because “the market is now fully relying on the ECB to intervene in the crisis”, which don’t add pressure on Germany, making German CDS irrelevant.

This new reality is not necessarily EUR/USD supportive as “markets seem to be aware of the dangers of continued ECB interventions”. “On the whole the markets seem to have a pretty realistic view: in the tug of war between politicians and the ECB the politicians will come out on top but the euro will have to pay the bill in the end”, added Karpowitz. According to Commerzbank analysts, if that negative correlation between the EUR/USD and German CDS were still on, the EUR/USD would be trading at around 1.35.