Why is the euro still strong?

Q. I just cannot understand the EUR/USD. Is this a anti USD play? Or is this just a short squeeze? Reserve diversification. What more bad news does it need to start trending down?

A. EUR/USD is being supported by reserve diversification but a large part of the underlying strength is a result of the deleveraging of European bank balance sheets. In order to clean-up over-leveraged balance sheets, banks are shedding assets overseas in unprecedented amounts and bringing capital back to Europe.

Here is one recent example of one such divestiture. There are countless more like them as money is pulled from the US, Latin America and Asia.

 

20 Comments

  1. And so what we should do? Still wait for the start of down trending or become bullish on euro, I speak with weekly view in mind!

  2. Hi Jamie,

    So after repatriation, is it anyone’s guess if the pair will finally trend down ultimately towards 2010 lows as per Elliott it ought to?

    Fundamentals, Panda included, are gruesome. I never saw a break down of 5000 pips in my short career, but could it happen?

    Thanks

  3. There are trillions of euros to be brought home. May be a while…

  4. Hi Jamie, austerity currencies seem to be in vogue, bit the bullet take the pain and get your house in order. Obviously investors see Europe as sorting the issues out eventually forming a stronger, closer bond that support each other. People view the euro as close to collapse but reading stuff like this there seems to a lot of opposing views as to what’s going on. You just got to trade it as you see it taking all possibilities into account. http://www.bloomberg.com/news/2012-04-26/santander-ceo-derides-surge-in-spain-defaults-mortgages.html

  5. Q Why is the USD so strong considering the Trillions in trash derivatives of their top banks ?
    http://www.businessinsider.com/9-banks-combine-for-over-200-trillion-derivatives-exposure-2012-4

  6. Jamie, the Euro is still strong because someone still want to keep the Dollar low. Good US exportations are needed.

  7. Seems that would imply an unloading of US assets too, like equities? With the threat of QE3 seeming to fade, are they simply waiting for the end of Operation Twist?

  8. That’s right. European banks like SocGen and Deutsche would never touch derivatives… ;)

  9. The ECB wants a weaker EUR as well…….Japan and UK stil printing money. It’s a race to the bottom Helio. Not just a USD story at all.

  10. It is difficult to understand the Euro and the whole idea about the European Union if you live in the US and listen to more or less negatively biased news when it comes to those two. But you should know that there is a convergence process ongoing in Europe which slowly but steadily leads to the establishment of a new super state with with one government, one legislative and one currency. The current situation has strengthened the conviction among the European leaders to speed up the integration and there is no doubt that this will happen. The Euro will benefit from this process and you can see that it is already a very serious competitor for the Dollar when it comes to currency reserves. The last bastion of the Dollar is the commodity trading – when it falls the Dollar will quickly loose its importance and will become one of the weaker currencies in the world.

  11. Would this logic apply to sterling too? Eur is showing strenght due to deleveraging, but sterling is stronger…
    Many thanks for the daily insight into forex which you deliver with a healthy dose of caustic humour :-)

  12. To an extent it could but I think the UK banks deleveraged earlier in the crisis, as the US banks did.

  13. because USD must be week..

  14. Hi Jamie, I wish you were right, but I’m afraid that is not the case……Repatriation to Euro either directly via EUR/USD or USD/EM over to EUR/USD can not be so fine tuned as it has been during quite some time now. The spikes comes from very minor EUR positive news, slightly negaive USD news (but still close to consensus, or when there are no news at all. So even if development somewhat eratic, it follows a certain trading pattern.
    Apart from that we have recent weeks spike in EUR/USD between 13.00-15.00 GMT (early US session) and that swing takes place regardless of good/bad news. At times I think you also overstate the importance of Panda, Russians, Japanese and ME diversification. They are not constanly antiamerican or have some subversive tactics.
    So I believe that you have to look for the reason more nearby, i.e in the US. The US financial market and their huge investment banks and big funds are by far the one wit the most short term focus of all markets. Financial markets in most other countries have no aim to force their central bank to take measures only to the benefit of them – they would never challange the CB – while US financial market openly battle the Fed for more “drugs” (QE). They create their own trading environment while financial institutions in e.g Europe (also before the crisis) would be extremely ccautious do do so.
    So my view is that there are no “suspect” antiamerican intentions behind the EUR/USD situation. Terrorist fright is one thing but looking for financial terrorist would take it above the top. It’s more simple than that; some major US investors are betting on (and forcing) a strong EUR/USD. Its all an attempt to squeez for more QE or at least, keep commodity and equity prices up by keeping the QE expectations up.
    And by the way, what role does NYK Stock Ex play? It now owns that many national stock ex move very closely to NYK even if the economy of that country is very different from the US. There is no fundamental explanation to this and the correlation since NYK took over is close to 100%, so I think that there are major intereasts (and algos programmed in that way) behind what we now see. To believe in a stronger USD under those circumstances is not realistic because US “investors” would not allow for a stronger USD if not Germany was downgraded four-five knots.

  15. Umm, okaaay…

  16. Did I just read, what I think I read? Or, did someone slip me a hit of acid? Anyways. Thanks for this week’s coverage! Everyone, have a nice weekend.

  17. i think the reason makes sense @@ each days of weeks i always told myself & investors to bid eurusd @13-15 gmt. i dislike euro & favour to look downside but i’m still curious why eurusd is always up during us open.

  18. Interesting, One of the first things one learns in FX is that the market is to large to rig.
    Careful study and common sense seems to point the other way.
    UK hits double dip recession, pound rises.
    Spain downgrade Euro rise.
    US mainly good news and the GDP wasnt that bad really, dollar falls of a cliff.
    Wake up guys , smell the coffee the market is rigged and always as been.

  19. Hi Jamie, indeed like your comments very much, but I think you are slightly on the wrong track. Let’s take this step by step;
    1. China may diversify, but not presently. Don’t forget, China is run by the Party (also the Central Bank), so weakening USD also means weakening CNY. That adds a lot to Chinese inflation and with salaries rising with dubble digits forcing up inflation, last thing they want is additional inflation from import prices. Party don’t want to destabilize China and why force down USD being one of Chinas’s major export markets?? Why make consumers in the US poorer?? A relatively strong USD is in the interest of China.
    2. Japan needs US for their export, so Japanese industry and banks has all interest in the world not to undermine the USD. (They like a strong EUR as well, but they are not that stupid so they undermine one of their two major trading areas. Japanese companies in the US have their accounting in JPY so no reason to pull down USD as results in less JPY to consolidate).
    3. Repatriation to Europe. Forget about it. Most of the major bankks (Nordic, German, French and even Spanish (recently BBV) are already at or close to meeting targets. Those banks who are not there have no major investments abroad to repatriate. Their money is stuck in their local messy environment and banks well capitalized have no futher need to repatriate..
    4. ME, OK to some extent but those flows are easy to monitor and there is so far no one who has been able to show that their activity has caused the present EUR strength
    5 EM.s are not moving speculative money out of respective country. A higher proportion of their earnings is put into productive local investmenst than in the US or even Europae and in fact they don’t give a damn about the USD (apart from that the US is still strong enough to prohibit that their currencies are traded directly agains e.g. the EUR but have to go via the USD – remaining part of a now fading political world dominance of the US. Take that away and US control over commodity market will disapear and USD as well as political importance go down the drain. One ton of Brazilian iron ore is traded agains a basket of currencies and bad luck (or the USD if down against the basket. Then price of course goes up but only in USD, not for others. Not even oil prices have gone up in e.g Nordic countries or quite some EM. Major problem with commodity prices is thus isolated to the US, UK and some EZ countries not having been able to grow (or having the desire to defenfd value of currency).

    So only white spot is the role of the US and there are more winners in the US, short term, than enywhere else, from a weak USD. The major ones are the financial sector plus US exporters (not because they export much more due to increased demand for US products abroad, (poor quality/performance apart from Apple, Facebook), but because it’s a way of inflating corporate results – more USD on the bottom line when export revenue converted to USD and with higher results follows higher equity prices, a feeling of increased global demand heating commodity prices and on we go. From a political point of view it’s also good with a weak USD. In the absence of any policy for improving US competitiveness and no money for investments or reducing unemployment through increasing jobs in public sector, only hope is to try to become competitive through a weak USD also keeping import from abroad down.
    I do like ForexLive a lot and especially yours and Adam’s comments, but WHY are you so reluctant to make any comments regarding US influence on fx and commodity market? I do not for a second believe that you are convinced that US players “white as snow” and none have special egocentric interests just like Russians or others may have at times (but not always).
    OK China, Japan and others move a lot of dough but some of the major movers are US pension and money funds, commodity market and certainly DJ/S&P and most of them,prefer a weak USD.
    US is not only pure rational “market” while others constantly have some more or less USD hostile approach.

  20. I like the observation about EU banks deleveraging and shedding assets overseas and bringing the money back home. It is one of the few outlooks that actually makes some sense when very little else does.

    So my question is… If they are shedding assets in unprecedented amounts, wouldn’t that imply that asset sales are not “in the ordinary course” and being conducted at a discount to FMV (however that is determined) thereby setting EU banks up for more writedowns and further weakening of balance sheets?

    Also, it is important to note that Europe is no longer in strictly a financial crisis. It is now a political one as well and it appears – from afar, granted – that the pro-austerity bloc is rapidly losing ground not just in the periphery but also in the core as well.

    Just an observation.

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