Euro Makes Fresh Lows -1.05 in View?

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Market Drivers March 10, 2015

Euro dives to fresh multi year lows as 1.0800 given
Kiwi wobbles on threat against Fonterra
Nikkei -0.67% Europe -0.44%
Oil $49/bbl
Gold $1157/oz.

Europe and Asia:
AUD New Business 0 vs. 4
CNY CPI 1.4% vs. 1.0%
EUR French IP 0.4% vs. -0.2%
EUR Italian IP -0.7% vs. 0.2%

North America:
No Major Data

The EUR/USD came under another vicious selling assault in morning London dealing today, dropping through the 1.0800 barrier to hit a low of 1.0734 before finally finding a modicum of support. The was no specific news to trigger the selloff but rather the growing realization in the market that euro’s political and economic woes are likely to continue for the foreseeable future.

Some analysts have pointed out that aside from the political tensions stemming from the crisis with Greece and the overall lackluster pace of economic activity as evidenced by the very weak Industrial Production number out of Italy today – the euro may now become a funding currency for carry traders exacerbating its decline.

With many EZ sovereign bonds now priced at negative yield up to the 5 year tenor and with ECB’s QE program providing a further bid for the bond market, the EZ short term rates are likely to remain negative for a long time to come. This dynamic presents carry trade speculators with a continuous source of cheap and even negative funds and continues to put downward pressure on the unit. That’s why any rallies in the EUR/USD are likely to be contained and he pair could ultimately head towards the 1.0500 figure especially of the Fed moves on rates by June of this year.

Elsewhere today the kiwi came under a quick burst of selling in Asian session trade after the New Zealand police announced that there was a threat against Fonterra to poison its baby formula product with a 1080 pest control chemical. Although the authorities believe the threat to be a hoax they are taking the investigation seriously especially in light of contamination issues in the past that have hurt Fonterra’s sales to China.

The kiwi tumbled through the .7300 figure and fell further on broad dollar strength before finally finding a bid ahead of the 7250 level. Tomorrow’s RBNZ meeting could provide the unit with a much needed lift if the central bank once again reaffirms its commitment to keeping rates steady. Some market players have speculated that the central bank may actually follow the RBA and lower rates, but with housing demand remaining very frothy we doubt the RBNZ would move to ease just yet.

In North America today the calendar is barren, but given the momentum nature of the market right now, the dollar rally could very well continue unabated but EUR/USD testing the 1.0700 level next while USD/JPY tries to make another run through the 122.00 level.

Boris Schlossberg
Managing Director

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