Why is the Euro So Strong?

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Market Drivers for December 9, 2013
Japan’s final GDP 1.1% vs. 1.6% eyed
Chinese Trade helps boost risk flows
Nikkei 2.29% Europe .05%
Oil $97/bbl
Gold $1231/oz.

Europe and Asia:
CNY Trade 33B vs. 21 B
JPY GDP 0.3% vs. 0.4%
AU ANZ Job Adverts -0.8% vs. -0.1%
EUR Sentix 8 vs. 10.5

North America:
No Data

Euro remained well bid on a quiet uneventful first day of the trading week boosted by strong Chinese Trade data over the weekend that helped fuel risk appetite on the open. The pair rose to a high of 1.3730 in Asian and morning European dealing as longs eyed the 1.3750 barrier as the next target for the unit.

The strength in the EUR/USD has taken many market participants by surprise especially given the much better than expected NFP numbers on Friday that have now increased the prospects of taper by the Fed markedly. Instead of falling, the EUR/USD now finds itself within 100 pips of the yearly highs despite lackluster economic conditions in the region and the constant reiteration by European monetary authorities that interest rates in the EZ are likely to remain low for a considerable period of time.

There are several possible reasons for euro’s surprising strength. The strong labor data out of US and the robust Trade Balance numbers from China suggest that global growth may be better than consensus view. Under that scenario, both US and China could act locomotives for global GDP expansion and help lift Eurozone out of its funk. We have noted for several weeks that the EUR/USD has been benefiting from very positive capital flows as investors chase relative valuation and the better economic data continues to provide ballast for that trade.

One other possible reason for euro resilience is the fact that despite positive labor sector growth the Fed may be in no hurry to taper given the tepid rate of inflation in US. Several analysts have pointed out that along with Friday’s consensus beating NFP, investors also saw the release of Fed favorite inflation measure the PCE index which printed at 1.1% – well below the 2% target rate favored by US monetary officials.

Given these dynamics in the market the EUR/USD rise does seem as unreasonable as fundamentals would suggest. However, with the pair now within striking distance of the yearly highs forward progress may be much more difficult. The region remains mired in a near recession state and the high value of the EUR/USD exchange rate will only serve to hinder growth. Although European authorities have been generally laissez-faire about the high value of the currency we believe that they will become more vocal if the pair rises above the 1.3800 level, especially if European corporates begin to put pressure on the policymakers to dampen the rise.

With no economic data on the calendar today in North America, trading in the currency market could remain quiet for the rest of the day with FX taking its cues from equities. For now EUR/USD remains steady around the 1.3700 level while USD/JPY continues to find resistance around 103.30 as lingering doubt about an early taper persist.

Boris Schlossberg
Managing Director

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