Is Euro the New “Yen”?

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Market Drivers February 6, 2020
Equities consolidate at highs
Euro defends the 1.1000 level
Nikkei1 2.38% Dax 0.58%
UST 10Y 1.64%
Oil $51/bbl
Gold $1554/oz
BTCUSD $9644

Europe and Asia:
No Data

North America:
No Data

After yet another pop to record high in Asia session trade, equity indices were muted in moring European dealing while currencies remained quiet throughout on a night of little newsflow or economic data

It’s been a generally quiet night of trade with EURUSD defending the 1.1000 figure yet again as the pair remains weak. Although data in the Eurozone has improved mildly over the past month trade in the pair is ignoring the fundamental data and trading on carry trade flows alone.

With Ms. Legarde making it clear that ECB monetary policy will continue to be accommodative for the foreseeable future European rates are likely to remain negative for at least another year or perhaps more. That, in turn, has made the euro the new yen. That is the currency is now the favorite funding source for a variety of carry trades and now trades essentially on risk-on/risk-off flows.

Little wonder then that the pair verticalized a few days back when equities sold off and has now dripped lower as equities reach fresh highs. For now, with equities in consolidation mode the EURUSD has found a modicum of support around the 1.1000 level but whether it holds that figure or not will be contingent exclusively on how stocks fare for the rest of the week.

To that end, the market has been in a near parabolic run fueled by the geyser of global central bank liquidity and somewhat positive US economic data. Yesterday the ADP report showed the strongest growth private nonfarm payrolls since 2015, but the good news was not confirmed by ISM Non-Manufacturing report which saw the employment component slip to 53.1 dropping by 1.7 points. The ADP data may be skewed by warm weather, but the ISM numbers though much more modest confirm that employment remains comfortably in the expansion mode.

Still, the risk of a downside print in NFP may be the one factor that could usher in a more meaningful correction in this relentless move higher if markets begin to understand that growth will be hampered despite central bank largesse.

Boris Schlossberg
Managing Director

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