Euro Will Fall, With Or Without Carry. By Nicholas Hastings
The return of the carry trade has been postponed--once again.
Rising concern about European debt contagion and falling optimism about the global recovery may be encouraging more investors to move out of the euro.
But instead of heading into higher risk commodity currencies, such as the Australian, New Zealand and Canadian dollars, they are moving into safe havens, such as the dollar, the yen and the Swiss franc.
See the euro's fall first against the yen and then against the Swiss franc:
Click Image to Enlarge
Click Image to Enlarge
Given recent events, there is every reason this trend will continue.
Data from China this week will only make matters worse if the figures confirm that the Beijing government has succeeded in slowing the economy down.
This will only contribute to fears that the global economy could yet face a double-dip recession.
In recent weeks, economic data from the euro zone and Japan have consistently been below expectations. And now, there is concern that U.S. growth could be stalling too after last Friday's disappointingly small rise in non-farm payrolls.
Manuel Oliveri, a currency strategist with UBS in Zurich summed it up: "We expect growth expectations to adjust further, and one cannot exclude that stock markets may increasingly start to reflect the risk of a double dip recession."
On top of this, contagion fears in the euro zone are growing. Although Hungary denied last Friday's reports that is about to face a Greek-style debt crisis, this hasn't stopped investors from pulling out of Europe for a while.
Instead of just targeting other large debtors, such as Spain and Portugal, as they did previously, investors appear to be staging a more wholesale selloff.
"Even markets close to Germany, like France, Austria and Belgium, really folded last week," said Steve Barrow, senior currency strategist with Standard Bank.
So instead of euro-zone countries falling one-by-one like dominoes, euro-zone financial markets could face a more immediate blowout across the whole region that would pose an even more serious risk to the future of the euro itself.
"The market might just apply pressure across the whole euro-zone bond/CDS market, looking to flatten all the dominoes at once," Barrow warned.
All this will intensify selling pressure on the euro, especially as euro-zone officials have shown little objection to the single currency's recent sharp decline. Even the euro's nasty dive below $1.20 last Friday failed to draw any response from G20 finance ministers when they met in South Korea last weekend.
The strength of investor preference for safe havens, rather than risky assets, was also apparent in the yen. The Japanese currency remains popular and has risen to almost a nine-year high against the euro, even though the country has just appointed a new prime minister who is more likely to intervene in the foreign-exchange market to stop the currency's appreciation.
Early Tuesday in Europe, the euro received some respite as Fed Chairman Ben Bernanke lifted spirits with his reassurance that the U.S. recovery is on track despite the problems in the euro zone. As Asian stocks rebounded, the euro rose to $1.1968 by 0645 GMT from $1.1917 late Monday in New York, according to EBS. It also rose to Y109.98 from Y109.04.
The dollar also managed to rise to Y91.89 from Y91.49 but analysts said the improvement in sentiment was fragile.
Rising concern about European debt contagion and falling optimism about the global recovery may be encouraging more investors to move out of the euro.
But instead of heading into higher risk commodity currencies, such as the Australian, New Zealand and Canadian dollars, they are moving into safe havens, such as the dollar, the yen and the Swiss franc.
See the euro's fall first against the yen and then against the Swiss franc:
Click Image to Enlarge
Click Image to Enlarge
Given recent events, there is every reason this trend will continue.
Data from China this week will only make matters worse if the figures confirm that the Beijing government has succeeded in slowing the economy down.
This will only contribute to fears that the global economy could yet face a double-dip recession.
In recent weeks, economic data from the euro zone and Japan have consistently been below expectations. And now, there is concern that U.S. growth could be stalling too after last Friday's disappointingly small rise in non-farm payrolls.
Manuel Oliveri, a currency strategist with UBS in Zurich summed it up: "We expect growth expectations to adjust further, and one cannot exclude that stock markets may increasingly start to reflect the risk of a double dip recession."
On top of this, contagion fears in the euro zone are growing. Although Hungary denied last Friday's reports that is about to face a Greek-style debt crisis, this hasn't stopped investors from pulling out of Europe for a while.
Instead of just targeting other large debtors, such as Spain and Portugal, as they did previously, investors appear to be staging a more wholesale selloff.
"Even markets close to Germany, like France, Austria and Belgium, really folded last week," said Steve Barrow, senior currency strategist with Standard Bank.
So instead of euro-zone countries falling one-by-one like dominoes, euro-zone financial markets could face a more immediate blowout across the whole region that would pose an even more serious risk to the future of the euro itself.
"The market might just apply pressure across the whole euro-zone bond/CDS market, looking to flatten all the dominoes at once," Barrow warned.
All this will intensify selling pressure on the euro, especially as euro-zone officials have shown little objection to the single currency's recent sharp decline. Even the euro's nasty dive below $1.20 last Friday failed to draw any response from G20 finance ministers when they met in South Korea last weekend.
The strength of investor preference for safe havens, rather than risky assets, was also apparent in the yen. The Japanese currency remains popular and has risen to almost a nine-year high against the euro, even though the country has just appointed a new prime minister who is more likely to intervene in the foreign-exchange market to stop the currency's appreciation.
Early Tuesday in Europe, the euro received some respite as Fed Chairman Ben Bernanke lifted spirits with his reassurance that the U.S. recovery is on track despite the problems in the euro zone. As Asian stocks rebounded, the euro rose to $1.1968 by 0645 GMT from $1.1917 late Monday in New York, according to EBS. It also rose to Y109.98 from Y109.04.
The dollar also managed to rise to Y91.89 from Y91.49 but analysts said the improvement in sentiment was fragile.
- 8 June |
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