Sive Morten
Special Consultant to the FPA
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Fundamentals
So, this week is a shorter a bit due Easter Holidays and, for the truth sake, not very intensive in terms of new events. Yes, we've got PCE and J. Powell speech, upside revision of GDP but in general it was either expected or had short lived impact on the market. Although important data releases are always stand in focus, we see some other processes that are spinning up. News over this processes are not focused in media, so it is difficult to take them together and put in the context. But when you do this, you see very interesting background. This is what we will do today.
As a by product of statists releases we see two events that have happened this week, which we see as most important. Although they are not related to data releases or J. Powell comments. We see signs of structural crisis acknowledgement among economical and political US establishment and suggest that this will have political consequences closer to the Fall of 2024. Thus these moments we keep for Gold report tomorrow as it also has tight relation with it. Another reason - just to not overload you with information on Holidays.
Market overview
The dollar gained on the euro on Thursday before key U.S. inflation data due on Friday and as investors squared positions for month- and quarter-end. The dollar rallied earlier on Thursday following comments from Fed Governor Christopher Waller late on Wednesday that recent disappointing inflation data affirms the case for the U.S. central bank holding off on cutting its short-term interest rate target.
Data on Thursday showed that the U.S. economy grew faster than previously estimated in the fourth quarter, lifted by strong consumer spending and business investment in nonresidential structures such as factories.
J. Powell has not said anything new, the only issue that stands around his speech is a bit delicate situation with report of the Philadelphia reserve Bank that we will consider tomorrow. PCE numbers have brought now big changes. Data has been released in a row with expectations, previous month was slightly revised higher for 0.1%:
U.S. banks with significant lending exposure to some multi-family properties and particularly rent-controlled housing are vulnerable to posting losses this year on rising costs facing landlords, according to Fitch Ratings analysts. Lending by banks to multi-family borrowers grew 32% since 2020 to $613 billion at the end of 2023, according to a March 19 report by Fitch.
But supply has begun to outstrip demand, creating downward pressure on the rents landlords can charge, Fitch noted during Wednesday's call. These landlords also face rising interest rates and insurance premiums, coupled with decreasing apartment values. These factors have weighed on several regional banks with high exposure to the asset class, and in particular those most exposed to rent-controlled multi-family loans, where landlords face a ceiling on rent increases to offset rising costs.
Fitch highlighted 10 banks with the greatest multi-family loan exposure as of year-end 2023. Flagstar Bank FBCANK.UL , which merged with New York Community Bancorp in 2022, topped the list with 43.6% of its loan portfolio in multi-family. Other banks with a high proportion of multi-family loans include First Foundation Bank, Dime Community Bank, Pacific Premier Bank, Apple Bank for Savings, according to Fitch. There were 49 banks at the end of 2023 with at least 5% of multi-family loans past due on their payments, the ratings agency noted. Most of these consisted of regional and community banks.
Ratings agency S&P Global on Tuesday downgraded its outlooks for five regional U.S. banks to due to their commercial real estate (CRE) exposures, in a move likely to reignite investor concerns about the health of the sector. The ratings agency downgraded the outlook for First Commonwealth Financial, M&T Bank, Synovus Financial, Trustmark and Valley National Bancorp to "negative" from "stable," it said.
As of Tuesday, S&P had negative outlooks on nine U.S. banks, or 18% of those it rates, it said, adding most of those ratings "relate, at least in part to sizable CRE exposures."
EU - big problems ahead
Today we take a look at some news and events that are not widely covered by media agencies because they are not "hot", but which have important meaning for our long term view. In fact they give us more confidence on USD dollar relative strength and downside trends on dollar related currency pairs, mostly EUR and GBP. Let's take a look at some "not hot" news in the stream.
Bank lending to euro zone companies and households continued to stagnate last month, with high interest rates likely to have discouraged borrowers as well as lenders, European Central Bank data showed on Thursday. Adjusted loans to households grew by only 0.3% in February, setting 9-year bottom, unchanged from the previous month. Growth in credit to companies accelerated slightly to 0.4% from 0.2% in January.
This is not surprising if people safe money and contract spending. Retail sales are strongly depressed while unemployment is raising as EU companies keep cutting jobs.
As media try to assure us - There is no crisis in Germany, but real wages (minus inflation) in 2022 fell at the highest rate since the Second World War. Nothing like this happened during the oil embargo, the reunification of Germany, the global financial shock of 2008, the European debt crisis. Now there are no analysts (perhaps except for DW) promising a bright future for Germany. Leading agencies agree that the German economy will stagnate until the end of 2025. However, the forecast does not include “black swans”, and they have been happening in Europe every year since 2019.
If (or when) Donald Trump’s comes to power the inevitable trade war between the United States and China will start. The export-oriented German economy that will be the most affected. Exports, consumption, investments will suffer, and over 4 years of confrontation, the Germans will lose another 120-150 billion dollars of GDP. That is, with the end of the conflict in Ukraine, Europe’s problems will not be over but will only begin. There are other economies that strongly depended from the Germany - Poland, the Czech Republic, and a number of smaller countries. A "lost decade" for debt-laden Europe, coupled with regular energy crises, will continue to spur revolts among various social strata, provoking the decline of the EU and the euro project.
The growth trend of the German economy, the locomotive and beneficiary of EU integration, broke down in 2019. Since then there has been no growth. But there is no pronounced decline. This is the effect of budget subsidies to support the economy. However, this model is not sustainable in the long term. The growing debt of the most financially disciplined member of the EU is a road to nowhere and a financial crisis looms on the horizon in a few years.
The financial crisis will be followed by a political one, since the model relying on cheap energy from Russia, cheap labor from Poland and the bottomless Chinese market no longer works. European politicians have no alternative development models. The decline of the euro zone began a decade ago. All attempts to extend it - through the printing press, the war in Ukraine, increasing debts - are playing with time - attempts to delay the inevitable collapse of a united Europe. However, over time, the number of problems does not decrease, but increases. At some point the system will go haywire.
Inflation does not allow the ECB to start cutting rates. At the same time, taxes for industrialists cannot be lowered - deficit budgets must be covered with something.
It is becoming more difficult for Europeans every year to compete with Chinese manufacturers operating on economies of scale, all other things being equal: labor costs, taxes, energy. Without cheap Russian energy, the European garden very quickly turns into a jungle.
The debts of European countries are a bomb under the economy. The ECB has been trying to sweep the crisis under the rug for a decade, preventing the debt pyramids of Greece and Italy from collapsing. France and Belgium are striving to join the club of extreme debtor countries.
Without central bank support, these countries are bankrupt. It is impossible to maintain a debt of 140-160% of GDP at rates of more than 3% per annum. Investors understand this, which is why they periodically exit European bonds. Fires arise and the ECB extinguishes them by pouring out the crisis through various support mechanisms. A side effect of this policy is inflation. At the same time, governments do not attach any importance to debt problems: over a decade, neither Italy, nor Greece, nor France have reduced their debts. Issues of supporting a pyramid are a headache for financiers - bankers and regulators.
But another important thing is that militarization, which the leaders of the EU countries are calling for today, is impossible for most states. War is very expensive, the largest economies in Europe do not have the resources for this, they were consumed in previous years. Now everybody watch only on inflation data and next C. Lagarde comments on what they will do with the rate, but do not consider overall situation in complex.
US meets inflationary pressure instead
Inflation’s salience with voters ranks well behind immigration and the general state of the economy but ahead of foreign policy, climate, taxes, healthcare and crime, according to the latest poll for the Wall Street Journal. Most voters disapprove strongly (50%) or somewhat (10%) of President Joe Biden’s handling of inflation, based on a nationwide survey, opens new tab of more than 1,700 registered voters conducted in late February. Persistent inflation, especially in services, has made the Federal Reserve cautious about cutting interest rates to help the U.S. economy accelerate.
Persistent inflation in the much-larger and more labour-intensive services sector is too important for the central bank to ignore. Services account for almost two-thirds of household spending (roughly one-third on housing, one-third on other services) with merchandise responsible for the rest. Service sector firms employ far more people (110 million) than manufacturers (13 million) and construction businesses (8 million). Service sector production ($16 trillion) is almost double that for goods ($9 trillion) and far above construction ($2 trillion).
Some of the continued increase in service prices during 2023 and 2024 likely represents an attempt to catch up with the higher price level in manufacturing after big increases between mid-2020 and mid-2022. For policymakers, the nightmare scenario is if services firms try to restore their prices relative to manufacturers, and workers whose incomes have fallen relative to inflation try to restore them to pre-pandemic levels.
Despite relative CPI and PCE numbers - inflationary expectations are raising. Rally on stock market, commodities reflect not only some demand but also built-in US Dollar inflation.
China’s effort to boost manufacturing and shore up the economy amid a real estate slump could put “meaningful upward pressure” on US inflation and push back the start of monetary easing, according to new research by the Federal Reserve Bank of New York. Credit flows to China’s factories have accelerated sharply over the past few years, as authorities seek to compensate for diminished lending to the property sector.
The new approach stands a chance of boosting China’s economic growth above the rates of the past two years, at least in the short term, New York Fed economists wrote in a blog post this week. If that scenario plays out, the extra demand from Chinese manufacturers would likely push up prices for commodities and intermediate goods, and result in a weaker dollar, according to the New York Fed team.
Vanguard doesn’t expect the Federal Reserve to cut interest rates this year, defying the view from Fed officials that the central bank remains on track to reduce rates three times in 2024. Its base case is no rate cuts by the Federal Reserve in 2024, and Shaan Raithatha, senior economist at Vanguard, said this could have ramifications for central banks — and markets — around the world.
Vanguard isn’t alone in raising the possibility of zero rate cuts from the Fed this year. Mark Okada, co-founder and CEO of Sycamore Tree Capital Partners, told CNBC’s “Closing Bell” last week that there’s a “good chance” the central bank doesn’t reduce rates in 2024. "We are in the higher-for-longer camp,” Okada said on March 12.
EUR IS LOOSING THE RACE
He said that if the Fed does hold rates steady in 2024, “and the ECB does cut, that raises questions as to what happens to the euro.” “The euro may depreciate, we don’t know by how much, but if you get the euro say going towards parity, maybe that’s an extreme assumption, then that clearly raises inflationary concerns further down the line,” Raithatha said. Vanguard’s Raithatha said the asset manager expects the ECB to reduce interest rates between four and six times this year.
Former EU Brexit negotiator Michel Barnier said that the best way to think about what central banks will do next is to bet on the path of least resistance. To state the obvious, central bankers are human beings. They like being popular. It is easier to be popular if you’re cutting interest rates than if you are raising them. the natural behavioural bias is for most central banks to set interest rates somewhere a bit lower than they probably “should” be in order to encourage optimal allocation of resources.
Another important USD bullish driving factor here is liquidity. Traders should brace for a global withdrawal of liquidity, which will usher in more market volatility, according to Gavekal Research. Technology stocks, gold and bitcoin are among the assets to have soared lately, even after the Federal Reserve raised interest rates, and the rich valuations in stock markets suggests that there’s still plenty of cash available.
These include a draining of the Fed’s reserve repo facility, more issuance of US Treasuries, the end to a decline in oil inventories and the potential repatriation of cash to Japan by domestic institutions after its central bank raises interest rate.
EUR/USD BEARISH CUMULATIVE EFFECT
The risks of a depreciation of the euro have increased, according to pricing in the options market. Hedge funds are tuning in for further weakness although do not expect strong action. Option dealers keep a long gamma at these levels, which means that to hedge their risks, they need to buy the euro when it falls and sell when it rises. An analysis of April maturities shows that the euro needs to break out of the $1.05-$1.10 area in order to reach levels that will force market makers to push the market in any direction.
At about 6.6%, the exchange rate’s volatility is the lowest it’s been since November 2021, having fallen from nearly 11% a year ago and illustrating how becalmed the market has become. This peaceful state may prove transient; given that rate-cutting cycles and recessions tend to hit the weaker side hardest, the euro looks increasingly vulnerable.
According to interbank traders based in Europe, there has been a new round of sales from leveraged investors this month. At the same time, corporate demand has weakened, and purchases by players using only their own money have decreased, which suggests that the market considers the fall of the euro as the path of least resistance.
Although Hedge Funds are positioning for further EUR weakness, they do not expect very strong movement in the future. According to traders, there is still little interest to options strikes below $1.0650 on OTC market. Until the yearly 1.07 lows are convincingly broken, players with leverage prefer to trade in the latest ranges.
The tone will be set by the difference in interest rates.
The common currency, however, can’t defy gravity forever — so a return toward parity with the greenback looks more likely than not over the course of this year. The two main drivers of currency values are relative central bank interest rates and respective growth outlooks Both are fading faster in Europe than stateside. On both measures, the US position looks superior, with the dollar also underpinned by its status as the world’s reserve currency.
Bank of New York Mellon Corp.’s proprietary iFlow system tracks its global custody client holdings which, worth $46 trillion, are the world's biggest. On balance, clients remain overweight in euros. Geoffrey Yu, the bank’s senior strategist expects euro-dollar parity to return, not just due to fundamental economic and monetary reasons but because investors are shifting rapidly from being extremely long of euros.
So, this week is a shorter a bit due Easter Holidays and, for the truth sake, not very intensive in terms of new events. Yes, we've got PCE and J. Powell speech, upside revision of GDP but in general it was either expected or had short lived impact on the market. Although important data releases are always stand in focus, we see some other processes that are spinning up. News over this processes are not focused in media, so it is difficult to take them together and put in the context. But when you do this, you see very interesting background. This is what we will do today.
As a by product of statists releases we see two events that have happened this week, which we see as most important. Although they are not related to data releases or J. Powell comments. We see signs of structural crisis acknowledgement among economical and political US establishment and suggest that this will have political consequences closer to the Fall of 2024. Thus these moments we keep for Gold report tomorrow as it also has tight relation with it. Another reason - just to not overload you with information on Holidays.
Market overview
The dollar gained on the euro on Thursday before key U.S. inflation data due on Friday and as investors squared positions for month- and quarter-end. The dollar rallied earlier on Thursday following comments from Fed Governor Christopher Waller late on Wednesday that recent disappointing inflation data affirms the case for the U.S. central bank holding off on cutting its short-term interest rate target.
Data on Thursday showed that the U.S. economy grew faster than previously estimated in the fourth quarter, lifted by strong consumer spending and business investment in nonresidential structures such as factories.
J. Powell has not said anything new, the only issue that stands around his speech is a bit delicate situation with report of the Philadelphia reserve Bank that we will consider tomorrow. PCE numbers have brought now big changes. Data has been released in a row with expectations, previous month was slightly revised higher for 0.1%:
U.S. banks with significant lending exposure to some multi-family properties and particularly rent-controlled housing are vulnerable to posting losses this year on rising costs facing landlords, according to Fitch Ratings analysts. Lending by banks to multi-family borrowers grew 32% since 2020 to $613 billion at the end of 2023, according to a March 19 report by Fitch.
But supply has begun to outstrip demand, creating downward pressure on the rents landlords can charge, Fitch noted during Wednesday's call. These landlords also face rising interest rates and insurance premiums, coupled with decreasing apartment values. These factors have weighed on several regional banks with high exposure to the asset class, and in particular those most exposed to rent-controlled multi-family loans, where landlords face a ceiling on rent increases to offset rising costs.
Fitch highlighted 10 banks with the greatest multi-family loan exposure as of year-end 2023. Flagstar Bank FBCANK.UL , which merged with New York Community Bancorp in 2022, topped the list with 43.6% of its loan portfolio in multi-family. Other banks with a high proportion of multi-family loans include First Foundation Bank, Dime Community Bank, Pacific Premier Bank, Apple Bank for Savings, according to Fitch. There were 49 banks at the end of 2023 with at least 5% of multi-family loans past due on their payments, the ratings agency noted. Most of these consisted of regional and community banks.
Ratings agency S&P Global on Tuesday downgraded its outlooks for five regional U.S. banks to due to their commercial real estate (CRE) exposures, in a move likely to reignite investor concerns about the health of the sector. The ratings agency downgraded the outlook for First Commonwealth Financial, M&T Bank, Synovus Financial, Trustmark and Valley National Bancorp to "negative" from "stable," it said.
As of Tuesday, S&P had negative outlooks on nine U.S. banks, or 18% of those it rates, it said, adding most of those ratings "relate, at least in part to sizable CRE exposures."
EU - big problems ahead
Today we take a look at some news and events that are not widely covered by media agencies because they are not "hot", but which have important meaning for our long term view. In fact they give us more confidence on USD dollar relative strength and downside trends on dollar related currency pairs, mostly EUR and GBP. Let's take a look at some "not hot" news in the stream.
Bank lending to euro zone companies and households continued to stagnate last month, with high interest rates likely to have discouraged borrowers as well as lenders, European Central Bank data showed on Thursday. Adjusted loans to households grew by only 0.3% in February, setting 9-year bottom, unchanged from the previous month. Growth in credit to companies accelerated slightly to 0.4% from 0.2% in January.
This is not surprising if people safe money and contract spending. Retail sales are strongly depressed while unemployment is raising as EU companies keep cutting jobs.
As media try to assure us - There is no crisis in Germany, but real wages (minus inflation) in 2022 fell at the highest rate since the Second World War. Nothing like this happened during the oil embargo, the reunification of Germany, the global financial shock of 2008, the European debt crisis. Now there are no analysts (perhaps except for DW) promising a bright future for Germany. Leading agencies agree that the German economy will stagnate until the end of 2025. However, the forecast does not include “black swans”, and they have been happening in Europe every year since 2019.
If (or when) Donald Trump’s comes to power the inevitable trade war between the United States and China will start. The export-oriented German economy that will be the most affected. Exports, consumption, investments will suffer, and over 4 years of confrontation, the Germans will lose another 120-150 billion dollars of GDP. That is, with the end of the conflict in Ukraine, Europe’s problems will not be over but will only begin. There are other economies that strongly depended from the Germany - Poland, the Czech Republic, and a number of smaller countries. A "lost decade" for debt-laden Europe, coupled with regular energy crises, will continue to spur revolts among various social strata, provoking the decline of the EU and the euro project.
The growth trend of the German economy, the locomotive and beneficiary of EU integration, broke down in 2019. Since then there has been no growth. But there is no pronounced decline. This is the effect of budget subsidies to support the economy. However, this model is not sustainable in the long term. The growing debt of the most financially disciplined member of the EU is a road to nowhere and a financial crisis looms on the horizon in a few years.
The financial crisis will be followed by a political one, since the model relying on cheap energy from Russia, cheap labor from Poland and the bottomless Chinese market no longer works. European politicians have no alternative development models. The decline of the euro zone began a decade ago. All attempts to extend it - through the printing press, the war in Ukraine, increasing debts - are playing with time - attempts to delay the inevitable collapse of a united Europe. However, over time, the number of problems does not decrease, but increases. At some point the system will go haywire.
Inflation does not allow the ECB to start cutting rates. At the same time, taxes for industrialists cannot be lowered - deficit budgets must be covered with something.
It is becoming more difficult for Europeans every year to compete with Chinese manufacturers operating on economies of scale, all other things being equal: labor costs, taxes, energy. Without cheap Russian energy, the European garden very quickly turns into a jungle.
The debts of European countries are a bomb under the economy. The ECB has been trying to sweep the crisis under the rug for a decade, preventing the debt pyramids of Greece and Italy from collapsing. France and Belgium are striving to join the club of extreme debtor countries.
Without central bank support, these countries are bankrupt. It is impossible to maintain a debt of 140-160% of GDP at rates of more than 3% per annum. Investors understand this, which is why they periodically exit European bonds. Fires arise and the ECB extinguishes them by pouring out the crisis through various support mechanisms. A side effect of this policy is inflation. At the same time, governments do not attach any importance to debt problems: over a decade, neither Italy, nor Greece, nor France have reduced their debts. Issues of supporting a pyramid are a headache for financiers - bankers and regulators.
But another important thing is that militarization, which the leaders of the EU countries are calling for today, is impossible for most states. War is very expensive, the largest economies in Europe do not have the resources for this, they were consumed in previous years. Now everybody watch only on inflation data and next C. Lagarde comments on what they will do with the rate, but do not consider overall situation in complex.
US meets inflationary pressure instead
Inflation’s salience with voters ranks well behind immigration and the general state of the economy but ahead of foreign policy, climate, taxes, healthcare and crime, according to the latest poll for the Wall Street Journal. Most voters disapprove strongly (50%) or somewhat (10%) of President Joe Biden’s handling of inflation, based on a nationwide survey, opens new tab of more than 1,700 registered voters conducted in late February. Persistent inflation, especially in services, has made the Federal Reserve cautious about cutting interest rates to help the U.S. economy accelerate.
Persistent inflation in the much-larger and more labour-intensive services sector is too important for the central bank to ignore. Services account for almost two-thirds of household spending (roughly one-third on housing, one-third on other services) with merchandise responsible for the rest. Service sector firms employ far more people (110 million) than manufacturers (13 million) and construction businesses (8 million). Service sector production ($16 trillion) is almost double that for goods ($9 trillion) and far above construction ($2 trillion).
Some of the continued increase in service prices during 2023 and 2024 likely represents an attempt to catch up with the higher price level in manufacturing after big increases between mid-2020 and mid-2022. For policymakers, the nightmare scenario is if services firms try to restore their prices relative to manufacturers, and workers whose incomes have fallen relative to inflation try to restore them to pre-pandemic levels.
Despite relative CPI and PCE numbers - inflationary expectations are raising. Rally on stock market, commodities reflect not only some demand but also built-in US Dollar inflation.
China’s effort to boost manufacturing and shore up the economy amid a real estate slump could put “meaningful upward pressure” on US inflation and push back the start of monetary easing, according to new research by the Federal Reserve Bank of New York. Credit flows to China’s factories have accelerated sharply over the past few years, as authorities seek to compensate for diminished lending to the property sector.
The new approach stands a chance of boosting China’s economic growth above the rates of the past two years, at least in the short term, New York Fed economists wrote in a blog post this week. If that scenario plays out, the extra demand from Chinese manufacturers would likely push up prices for commodities and intermediate goods, and result in a weaker dollar, according to the New York Fed team.
Vanguard doesn’t expect the Federal Reserve to cut interest rates this year, defying the view from Fed officials that the central bank remains on track to reduce rates three times in 2024. Its base case is no rate cuts by the Federal Reserve in 2024, and Shaan Raithatha, senior economist at Vanguard, said this could have ramifications for central banks — and markets — around the world.
Vanguard isn’t alone in raising the possibility of zero rate cuts from the Fed this year. Mark Okada, co-founder and CEO of Sycamore Tree Capital Partners, told CNBC’s “Closing Bell” last week that there’s a “good chance” the central bank doesn’t reduce rates in 2024. "We are in the higher-for-longer camp,” Okada said on March 12.
EUR IS LOOSING THE RACE
He said that if the Fed does hold rates steady in 2024, “and the ECB does cut, that raises questions as to what happens to the euro.” “The euro may depreciate, we don’t know by how much, but if you get the euro say going towards parity, maybe that’s an extreme assumption, then that clearly raises inflationary concerns further down the line,” Raithatha said. Vanguard’s Raithatha said the asset manager expects the ECB to reduce interest rates between four and six times this year.
Former EU Brexit negotiator Michel Barnier said that the best way to think about what central banks will do next is to bet on the path of least resistance. To state the obvious, central bankers are human beings. They like being popular. It is easier to be popular if you’re cutting interest rates than if you are raising them. the natural behavioural bias is for most central banks to set interest rates somewhere a bit lower than they probably “should” be in order to encourage optimal allocation of resources.
Another important USD bullish driving factor here is liquidity. Traders should brace for a global withdrawal of liquidity, which will usher in more market volatility, according to Gavekal Research. Technology stocks, gold and bitcoin are among the assets to have soared lately, even after the Federal Reserve raised interest rates, and the rich valuations in stock markets suggests that there’s still plenty of cash available.
These include a draining of the Fed’s reserve repo facility, more issuance of US Treasuries, the end to a decline in oil inventories and the potential repatriation of cash to Japan by domestic institutions after its central bank raises interest rate.
EUR/USD BEARISH CUMULATIVE EFFECT
The risks of a depreciation of the euro have increased, according to pricing in the options market. Hedge funds are tuning in for further weakness although do not expect strong action. Option dealers keep a long gamma at these levels, which means that to hedge their risks, they need to buy the euro when it falls and sell when it rises. An analysis of April maturities shows that the euro needs to break out of the $1.05-$1.10 area in order to reach levels that will force market makers to push the market in any direction.
At about 6.6%, the exchange rate’s volatility is the lowest it’s been since November 2021, having fallen from nearly 11% a year ago and illustrating how becalmed the market has become. This peaceful state may prove transient; given that rate-cutting cycles and recessions tend to hit the weaker side hardest, the euro looks increasingly vulnerable.
According to interbank traders based in Europe, there has been a new round of sales from leveraged investors this month. At the same time, corporate demand has weakened, and purchases by players using only their own money have decreased, which suggests that the market considers the fall of the euro as the path of least resistance.
Although Hedge Funds are positioning for further EUR weakness, they do not expect very strong movement in the future. According to traders, there is still little interest to options strikes below $1.0650 on OTC market. Until the yearly 1.07 lows are convincingly broken, players with leverage prefer to trade in the latest ranges.
The tone will be set by the difference in interest rates.
The common currency, however, can’t defy gravity forever — so a return toward parity with the greenback looks more likely than not over the course of this year. The two main drivers of currency values are relative central bank interest rates and respective growth outlooks Both are fading faster in Europe than stateside. On both measures, the US position looks superior, with the dollar also underpinned by its status as the world’s reserve currency.
Bank of New York Mellon Corp.’s proprietary iFlow system tracks its global custody client holdings which, worth $46 trillion, are the world's biggest. On balance, clients remain overweight in euros. Geoffrey Yu, the bank’s senior strategist expects euro-dollar parity to return, not just due to fundamental economic and monetary reasons but because investors are shifting rapidly from being extremely long of euros.
