Why Does The Euro Refuse To Fall?

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Market Drivers for November 11, 2013
Markets quiet as many bourses closed for Veteran’s day
Chinese data in line but Aussie remains under pressure
Nikkei 1.30% Europe -0.27%
Oil $94/bbl
Gold $1284/oz.

Europe and Asia:
CNY New Loans 506B vs. 581B
JPY Eco Watchers 51.8 vs. 54.2

North America:
Bank holiday in US and Canada

It’s been a very quiet start of week’s trade in the currency market with many G-10 bourses closed for Veterans Day. In North America the equity markets will be open, but the bond markets will be closed most likely leading to a relatively sedate session later on.

Meanwhile dealing in Asia and Europe was subdued with dollar continuing to hold its gains against the yen, but slipping somewhat against the euro as the EUR/USD inched its way towards the 1.3400 figure. Despite the ECB rate cut last week and the better than expected NFP data out of the US on Friday, the euro continues to remain bid much to the consternation of many bears that expected a sharper selloff in the wake of last weeks developments.

There are several possible reasons for EUR/USD teflon like resilience. First and foremost the currency continues to be a beneficiary of capital flows. Asian central banks remain avid buyer of the unit partly for diversification reasons, but also for investment reasons as well. The Chairman of Bank of China noted last week that they view European equities as their favorite investment vehicles given their relative undervaluation and the prospect of recovery in the region.

Secondly, despite the rate cut from the ECB, market analysts believe that there were were several dissenters on the board including Weidmann and Nowotny. Therefore some currency traders believe that the ECB may be nearly as accomodative as initially thought especially if the data from the region continues to show modest improvement and the final inflation readings are revised upward. Certainly there remains tremendous institutional resistance at the ECB to the kind of open ended monetary easing approach practiced by the Anglo-Saxon central banks of US and UK.

Lastly, the threats by South Carolina Senator Lindsey Graham to put Janet Yellen’s nomination for Fed Chairman on hold in order to obtain further information regarding Benghazi, may have cast a shadow of doubt on the buck as market participants view this development with caution. Few analysts believe that Mr. Graham will proceed with his threat, but if he does that could create the type of uncertainty in the market that existed just a few weeks ago during the government shutdown. In either case, further interference from Washington is likely to delay the taper perhaps until March and that could provide the euro with more reason to remain bid.

Boris Schlossberg
Managing Director

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