Analysis and Opinion »

Asian Session – Euro crashes post- ECB QE; eyes 1.05

Share on StockTwits
Published on

EU flagsThe euro continued its seemingly unstoppable slide during today’s Asian session dipping below the 1.07 mark against the US dollar and trading as low as 1.0665.  The euro also made an 18-month low against the Japanese yen the previous day as it fell to 129.20.  The fresh low of the euro versus the pound was 0.7079 – a fresh 7 ½ year low.

The euro’s weakness was a result of follow-through selling after the start of Quantitative Easing by the European Central Bank on Monday.  Expectations of QE have already led to a significant reduction in Eurozone bond yields; a trend that has accelerated sharply in recent sessions and has undermined the euro further.  This has also led to talk of possible capital outflows away from the Eurozone as the prospect of continued QE, low bond yields, a falling euro and mediocre growth prospects make capital to seek more attractive destinations.

Nervousness about Greece’s commitment to the agreement for reforms versus additional funding did not help the euro also.  Technical talks between Greece and its creditors are scheduled to start today in Brussels.

Having stated the obvious negatives about the euro, sales of the currency have taken on a life of their own lately and many traders appear to be selling the euro first and asking questions later.  Therefore the euro’s latest decline can also be attributed to some short-term speculation as well since the euro is plumbing to new multi-year lows without any particular fresh negative news.

On the other end of the spectrum, the US dollar is performing very well on expectations US interest rates will begin to rise at some point in the coming months.  Next week’s Federal Reserve meeting is very important in this respect, for the signals it will send for a possible future rate hike.  The possibility of higher interest rates is certainly helping the dollar, but it is hurting risk assets such as stocks and emerging market currencies such as South African rand, the Turkish lira and others.  The S&P 500 posted a 1.7% drop yesterday and closed below its 50-day moving average for the second consecutive day.

The yen did not benefit as expected from risk-aversion, as it remained under pressure versus the US dollar around 121.30.  Japanese machinery orders came in mixed today, pointing to lackluster business investment in the country.  In the region, a raft of Chinese economic data such as industrial production, retail sales and fixed asset investment all came in lower-than-expected, sparking concern about the prospects for global growth.

For the remainder of the day, a speech by Mario Draghi in a Frankfurt conference, UK industrial production and the results of bank stress tests in the United States are likely to be the main items of interest.

Share on StockTwits