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15 May 2013
Forex Flash: EUR driving forces become clearer by the day - BMO Capital Markets
FXstreet.com (Barcelona) - Stephen Gallo, European Head of Currency Strategy at BMO Capital Markets notes that with each passing day, investors are receiving more clarity on the degree to which macro economic divergence and macro economic downside are the principal driving forces for the EUR at present.
Most notably, he feels that the breakdown in the strong, positive relationships between EUR/USD and the Eurostoxx 50 and between EUR/USD and the 1-year EUR-USD basis a symptom of the persistent supplanting of financial stability risks with macro economic ones. Gallo adds that this of course must be taken in combination with the clear bids the EUR is receiving on the way down (note the stubborn resistance to downside in EUR/GBP and the observable bid in EUR/CHF). Overall, this would appear to suggest that other factors, such as EUR interest rate spreads vis-à-vis the rest of the world, are developing a bigger “weight” in dictating intraday EUR fluctuations.
He adds, “Our base case is for this trend in the EUR to continue but at a measured pace, particularly in light of the fact that yield-seeking bids in the currency are likely to persist despite the macro economic downside risks the Eurosystem is still facing. Indeed, with monetary policy in Germany still arguably “too loose” it is something of a shock that economic growth and other data there are still largely missing expectations to the downside.” He feels that from a policy-setting angle, these developments also go a long way in explaining why there appears to be a shifting focus at the ECB from “fostering macroeconomic adjustment” over to what can be done to actually rein in these downside risks. BoE policy is certainly having an influence over decision making at the ECB, and this is exactly the way things should work in a “single market”.
Gallo sees that the FX markets continue to be ablaze with bigger turnover and more two-way risks, and we will continue to look for opportunities for the EUR to “catch-up” on the downside once some of the yield-seeking bids fade. Indeed, this appears to already be happening in EUR/AUD, and he would for the time being look to continue gently fading rallies towards the 1.3100 mark until EMU data begin to improve. Having said this, He writes, “a stronger USD on the basis of a rising rate advantage in the US has the potential to hit the AUD harder than the EUR on the way down, given the former’s journey into the previously unchartered territory of “low yield”. Indeed, the decline in the EUR today has probably tended to relieve some downward pressure on the AUD overall.”
Most notably, he feels that the breakdown in the strong, positive relationships between EUR/USD and the Eurostoxx 50 and between EUR/USD and the 1-year EUR-USD basis a symptom of the persistent supplanting of financial stability risks with macro economic ones. Gallo adds that this of course must be taken in combination with the clear bids the EUR is receiving on the way down (note the stubborn resistance to downside in EUR/GBP and the observable bid in EUR/CHF). Overall, this would appear to suggest that other factors, such as EUR interest rate spreads vis-à-vis the rest of the world, are developing a bigger “weight” in dictating intraday EUR fluctuations.
He adds, “Our base case is for this trend in the EUR to continue but at a measured pace, particularly in light of the fact that yield-seeking bids in the currency are likely to persist despite the macro economic downside risks the Eurosystem is still facing. Indeed, with monetary policy in Germany still arguably “too loose” it is something of a shock that economic growth and other data there are still largely missing expectations to the downside.” He feels that from a policy-setting angle, these developments also go a long way in explaining why there appears to be a shifting focus at the ECB from “fostering macroeconomic adjustment” over to what can be done to actually rein in these downside risks. BoE policy is certainly having an influence over decision making at the ECB, and this is exactly the way things should work in a “single market”.
Gallo sees that the FX markets continue to be ablaze with bigger turnover and more two-way risks, and we will continue to look for opportunities for the EUR to “catch-up” on the downside once some of the yield-seeking bids fade. Indeed, this appears to already be happening in EUR/AUD, and he would for the time being look to continue gently fading rallies towards the 1.3100 mark until EMU data begin to improve. Having said this, He writes, “a stronger USD on the basis of a rising rate advantage in the US has the potential to hit the AUD harder than the EUR on the way down, given the former’s journey into the previously unchartered territory of “low yield”. Indeed, the decline in the EUR today has probably tended to relieve some downward pressure on the AUD overall.”