The price action was interesting yesterday. Equities dipped in the European morning, but rallied as US markets opened. I can’t say it’s something I’ve been keeping an eye on recently but sentiment segmentation is often interesting, albeit I don’t suggest that European investors are bearish and US investors bullish at this time.  What is clear this morning is that dollar strength appears to have stalled for the moment and the equity market rally continues unabated.


The euros woes also appear to be continuing unabated too, and even though it’s been two days since a new year to date low has posted (versus the dollar), it has seriously underperformed its peers and has barely participated in the dollars pullback. This is just another sign that the conditions may finally be in place for a structural weakening of the single currency. At the peak of the Eurozone crisis there were often debates about why the euro was able to maintain its strength despite the catastrophic headwinds it faced. It seems the answer is clear now. Quite apart from central banks recycling their intervention dollars (Emerging market central banks fighting against domestic currency strength bought huge amounts of dollars when intervening, but would then need to rebalance their currency reserve portfolios back to their model weightings. This always means buying euros versus dollars as the euro, rightly, has the second largest weighting in any decent model), but also European banks were forced to sell their US assets to shore up their balance sheets. The suspicion is that those sales are in the multiples of trillions, which would be one heck of a head wind for anyone betting on euro weakness. The reason I mention this, is that perhaps most of that flow has gone now. Arguably with bund yields below 1% and US 10yr yields above 2% there’s a compelling reason for structural flows in the other direction. The time may come for a steady decline in EUR/USD on a 2 – 3 year view, surely it will take at least that long to solve the problems of France, Italy, Spain et al, assuming some new crisis doesn’t hit the US in the interim. I’m not saying that that big trade starts now, I’m just speculating that the next serious attack on the euro might not be resisted by hidden forces in quite the way it was in the past. Furthermore there are reasons for the euro to become a major funding currency just like the Japanese yen has been, but I’ll expand on that another time. Food for thought


Big data out of the US today, with inflation numbers, in particular the Core PCE numbers that the Federal Reserve pay special attention to. But perhaps they’re not as big as we think anymore? After all one of the key takeaways from Jackson Hole has been the absolute focus on employment, regardless of what happens to inflation. For now I’ll keep an eye on the dynamic between the dollar and overall risk sentiment. Have a great weekend!

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