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1 Nov 2013
Dreadful action in euro just a correction or something more serious brewing?
FXstreet.com (Barcelona) - The decline in the euro over the last few days has been eye-opening to say the least. Are the fundamental concerns driving this action valid? And, are the technicals validating these concerns with breakdowns?
Perception: Fed tapering soon + European deflation. Is it a reality, though?
So, the word on the street regarding the euro’s declines of the last 48 hours or so is that they began with the renewed chatter of the Fed beginning its QE-tapering program in December or January depending on market conditions (and the Washington political environment). That spark actually met with a bit of gasoline when more attention was paid this week to certain favorite indicators like the yield on the 10-year German Bund – which has been declining noticeably despite the buoyant action in global equities in general and German equities in particular. The Bund's yield actually closed at 1.67 – just a tick above the key “correction support” level at 1.66.
There’s an old saying in technical circles that the action in bonds leads the action in stocks. Well, it is then proper to closely monitor the action in yields – both in Europe as well as the US – and to take special notice when they are diverging from equities by falling when, in theory, they should be rising. Who are the parties out there buying up German Bunds in the face of rising stocks and what is their motivation for doing so? Does this “big money” pool know something about what’s happening or what will be happening that they deem it wise to do all of this fixed income buying?
The other side of the equation is the recent upward pressure in the US Dollar on the thought that the Fed may start tapering their QE purchases soon. This seems a little less credible of a factor than does European deflation. With another round of sparring between the Dems and Repubs planned for the next few months, it seems rather hard to believe that Bernanke or Yellen would go for that type of hawkishness this soon (December or January). Instead, logic tells us that tapering may well begin in 2014 sometime – and likely only after the D.C. dancing is over.
So, from a fundamental / analytical basis, there does not seem to be actual facts driving this move higher – but rather a lot of supposition on the US side of the Atlantic. At least in Europe, we see a puzzling / potentially-troubling decline in the yield of the 10-year Bund which – if it continues – will turn into an outright warning signal for European risk assets – and perhaps global risk assets.
Technicians say the key bullish macro technicals are still intact – for now
Technicians say that no real alarms need be signaled unless and until the 1.66% level on the 10-year German Bund or the 1.3484 level for the EUR/USD are violated on the downside. If either of those breaks occurs on a closing basis, sound the storm warnings!
Perception: Fed tapering soon + European deflation. Is it a reality, though?
So, the word on the street regarding the euro’s declines of the last 48 hours or so is that they began with the renewed chatter of the Fed beginning its QE-tapering program in December or January depending on market conditions (and the Washington political environment). That spark actually met with a bit of gasoline when more attention was paid this week to certain favorite indicators like the yield on the 10-year German Bund – which has been declining noticeably despite the buoyant action in global equities in general and German equities in particular. The Bund's yield actually closed at 1.67 – just a tick above the key “correction support” level at 1.66.
There’s an old saying in technical circles that the action in bonds leads the action in stocks. Well, it is then proper to closely monitor the action in yields – both in Europe as well as the US – and to take special notice when they are diverging from equities by falling when, in theory, they should be rising. Who are the parties out there buying up German Bunds in the face of rising stocks and what is their motivation for doing so? Does this “big money” pool know something about what’s happening or what will be happening that they deem it wise to do all of this fixed income buying?
The other side of the equation is the recent upward pressure in the US Dollar on the thought that the Fed may start tapering their QE purchases soon. This seems a little less credible of a factor than does European deflation. With another round of sparring between the Dems and Repubs planned for the next few months, it seems rather hard to believe that Bernanke or Yellen would go for that type of hawkishness this soon (December or January). Instead, logic tells us that tapering may well begin in 2014 sometime – and likely only after the D.C. dancing is over.
So, from a fundamental / analytical basis, there does not seem to be actual facts driving this move higher – but rather a lot of supposition on the US side of the Atlantic. At least in Europe, we see a puzzling / potentially-troubling decline in the yield of the 10-year Bund which – if it continues – will turn into an outright warning signal for European risk assets – and perhaps global risk assets.
Technicians say the key bullish macro technicals are still intact – for now
Technicians say that no real alarms need be signaled unless and until the 1.66% level on the 10-year German Bund or the 1.3484 level for the EUR/USD are violated on the downside. If either of those breaks occurs on a closing basis, sound the storm warnings!