On The Dislocation Between The EUR And PIIGS Insolvency Risk

Tyler Durden's picture

SocGen provides a very informative chart on the dramatic dislocation between the EURUSD and PIIGS risk levels, as demonstrated by Greek CDS prices. Whereas in the past the two correlated very strongly, since early 2011, the pair has diverged dramatically, leading many to speculate that just like in the case of Japan, the G-7 did another coordinate intervention to push the EUR higher in 2011 at the expense of the USD and other currencies. Is it time for a "correlated" snapback? SocGen muses: "After reaching a 17-month historical high of 1.4940 last Wednesday, the EUR/USD fell towards 1.4250. The risk of a further drop cannot be excluded short term given today’s climate, even though the 1.4250 support zone appears solid (50-day moving average) and breaking through this level would open the door to a rate of 1.4000."

And some more on this curious divergence:

Regarding the euro, the current uncertainty is fuelling profit taking which had already started following a combination of very negative factors over the past days (Trichet’s less hawkish tone, correction on commodities, better-than-expected US job report). Moreover, it looks like the market has ignored this risk factor since months as it has been focused on other drivers (rate spreads, ECB tightening,…). Since January 2011, EUR/USD has spiked, and the Greek CDS also (see chart below). Such a negative correlation is very unusual and the fact that the market would focus again on this topic justifies the ongoing correction.

However, it is much too soon to talk about a trend reversal as the factors responsible for this correction are not expected to last, the European debt crisis should ease once a solution is announced and the fundamentals are expected to remain buoyant (rate spread with the US, US structural fundamentals, etc.). We keep our mid-term bullish scenario toward the 1.50 area or even above. Until then, nervousness and the risk of a further correction will remain present.

For a euro trend reversal to take place, the Fed would have to raise its rates earlier than expected, the ECB raise its rates less than expected or the Greece scenario become a catastrophe for the eurozone overall (default, poorly prepared restructuring with a strong impact on the banking sector, etc.). However, we aren’t there yet.

What does any of this means? Who knows: with central planning, it is best to just hand your cash account over to the brokerage for safekeeping, and assume 100% losses over any period of time as a guaranteed.

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oogs66's picture

the only thing i know for sure is that Trichet and Bernanke have way too much power

SheepDog-One's picture

Now theres a few people with way too much power, and the rest have no power whatsoever.

Sudden Debt's picture



all those freedoms and no clue what to do with it... FEMA CAMP FOR YOU FOR YOUR NEXT INDOCTRINATION STUDY!

ivana's picture

I believe that 2 of them must meet regularly and enjoy touching eachother.
Nobody knows how far they go ... still secret

John Wilmot's picture

I heard Bernanke submitted an application to replace Hitler as Satan's girlfriend, they said they'll keep it on file. Go long pineapples?

topcallingtroll's picture

Why are some people believing EU statements on monetary policy?

They dont want a strong euro.

They dont want a superweak one either. EUR/USD 1.25 to 1.50 will do quite nicely if they can control it.

Sudden Debt's picture

Yes, you're right. We should only go by the US statements on monetary policy.



Clueless Economist's picture

CNBS is actually quite useful to watch.  No, I am not talking about Steve Liesman's genius, but the commercials.

--I may be in my pajamas now...

--Get Magic Jet or Jack or whatever now

--Bill Schaeffer made a financial gain with his invention, but these results are not typical

--Attention parents and grandparents with Gerber life insurance plan for your newborn

Highly polished and professional commercials keeps me glued to CNBS

SheepDog-One's picture

Magic Jack at least 10 years behind the technology, just sign up for free Skype, conference calls, messages, all free as long as you dont mind the CIA monitoring. But thats included with everything now anyway.

SheepDog-One's picture

I got this one invention for Wall St it may or may not make me a profit but its a rope design with a noose at 1 end. COuld be useful and have a decent market.

Overflow-admin's picture

I was thinking Greece should leave the Euro, but doesn't that chart say the Euro drops the Greece?

Rynak's picture

Those two options are not mutually exclusive :)

SheepDog-One's picture

I dont see what the problem is, just start printing more fiat imaginary currency! Solves everything.

unununium's picture

I can't glean much value from these wacky crosses.  I need a EUR:Gold chart.

Overflow-admin's picture


There you go. Here's the fiat value.

unununium's picture

Now that is one rotten chart.  Much easier to read than the engineered tea leaves.

Sudden Debt's picture



that should fix that problem....





vote_libertarian_party's picture

I think what it tells us is the US is in a worse position then Euroland (pretty scary)

Cone of Uncertainty's picture

Exactly, that chart is fatally flawed.

Reprint it with the Euro relative to gold.

Sudden Debt's picture

No, I think we're both pretty much fucked up.


cowdiddly's picture

M R Pigs

M R Not

O S M is

L I B, M R Pigs

SheepDog-One's picture

Watching the various worthless currencies and 'bonds' or whatever bob up and down relative to the worthlessness of the others...what a bunch of crap.

Overflow-admin's picture



RobotTrader's picture

Dividend yields on BBVA and STD are 7% and 12%.

That's too tempting for Grandma to ignore when she's getting a paltry 1 basis point on her 90-day T-Bill.

citta vritti's picture

Aren’t grannies too old for STDs? I guess it depends on when u start.

topcallingtroll's picture

Banco Santander

Its an 8.06 yield now, but granny better have some big hairy balls if she wants to play that game. An extra dose of stupidity wouldnt hurt either.

Not one i want to hold ten years for the dividends.

bobby02's picture

Maybe it's not FX mispricing but rather CDS. Counterparty risk, anyone? Who is writting this insurance? Who holds porcine debt?

LIBOR-OIS has been widening for at least 6 months. Coincidence?

stormsailor's picture

meanwhile, back at the ranch, the /es is up 6.00 for no reason other than it is not up 12.00

Clowns on Acid's picture

The Euro /  PIGS CDS divergence is pricing in the exiting of Greece, et al, from the Euro. The article is written by a career FX hack inside the French bank. There are thousands of these guys collecting healthy checks writing this thin gruel each day. They all would have been fired in there had been no stimulus to banks. That is the real crime of Fed stimulus.   

Market has to be considering a 2 tier Euro, the Club Med Euro vs the Buba based Euro. Spain becomes the "Buba" of the new Club Med Euro.

Haircuts of up to 50% for bondholders of PIGS debt (and they are lucky to get that).

USD to sterngthen in near term as talk (useless) of massive cuts  in US spending is splayed resplendently across Lame Stream Media monosyllabic talking heads. But they are talking heads with commitment.


Catullus's picture

I think they're coordinating a default or restructuring with a new debt ceiling/QE double down. When bill gross is this short, the risk to the UST market is too great. Some of the PIIGS are perfect sacrificial lambs for this.

HedgeFundLIVE's picture

and lets not forget about the sh*t going on in the middle east:


hildebrand's picture

"Whereas in the past the two correlated very strongly, since early 2011, the pair has diverged dramatically, leading many to speculate that just like in the case of Japan, the G-7 did another coordinate intervention to push the EUR higher"

You know, Tyler, Greek's share of Eurozone GDP is (just) 2.5%. That might have to do something with the "dramatic diverge"...


Humberto Eco's picture

Is this USD tunneling process?

eurusdog's picture

Average returns closed below 0 for the first time this year, yesteday. Whether it's lack of support from cordinated intervention or people are starting to question the EZ as a whole, cracks are starting to show.

writingsonthewall's picture

Contradictions upon contradictions, upon contradictions......Capitalism is contradictory and these are the consequences of building on top of them.

You think they have gone...but they have just moved on. The crisis is in a 'hidden phase' awaiting the next shock.


ratso's picture

The Pac Rim countries have an

incentive to keep the Euro high.

Their exports to Euroland depend on their ability

to afford them.

They have supported the Euro in the last crisis by

buying Euro bonds issued by the PIIGS.

alexwest's picture

kind of stupid..
take germany CDS and eur/$, i guesss there will not be

this asshole from socgen does he know that Greece is v.v. small and unimportant part of Europe.. actually not much of europe.. more like Turkey or countries from N africa/ middle east.. (egypt. Israel, etc)

germany + france+ holland+ denmark+ sweden + finland/etc is core europe.. they're pretty healthy, people are not engaged in stupid speculations like n. americanos

they are pretty frudal, hard working, v. big savings..

thats why despite this shit from spain/itreland/greece euro is so high today..



kaiserhoff's picture

Soc Gen can't supervise its own trading desk.  How about this?  Markets discount the future.  Maybe the market is starting to discount a two-tiered Europe/Euro. 

John Wilmot's picture

Anyone want to guess what the name of the degenerate southern euro currency will be? If so, let's you and me split on the domain name and flip it to those wankers in a few months