Is The EUR Too Expensive?

Tyler Durden's picture

Relative to interest rates (and swap spread differentials), the EURUSD is at almost its most 'expensive' in 15 months. It appears support for a 'strong' EUR is waning; as the swap rate tends to signal, even ECB President Draghi - as Bloomberg Briefs notes - suggested support on the Governing Council for a reduction of the main policy rate has increased appearing to have used the downward revision to the Eurosystem staff GDP forecasts as an excuse to soften his tone. Between Spain's auctions hitting a wall of 'virtual intervention limits' and Italy's political turmoil, it appears (at least fundamentally) that the EUR should be weaker (we suepct currently aided by incessant repatriation flows). Options markets are pricing in expectations of further weakness but it appears the EURUSD rate remains bound by the Fed-to-ECB expectations of a wholesale Spanish bailout (increase in ECB balance sheet) and the Fed's expansion via QE4. For now, positioning is not indicating any squeeze with the net speculative shorts at the lowest level since September 11 - coincidentally the last time EURUSD was so rich to swap spreads.



Chart: Bloomberg

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bankonthebust's picture

It's all too fucking expensive. Someone please press the RESET button. PLEASE!!!!

Careless Whisper's picture

The Careless Whisper ARE YOU STARTING TO GET IT ? News Update & Threadjacking


Offshore Mega Bank HSBC Admits Running Money Laundering Operation For Mexican Drug Cartels And Al Kay Duh; $60 Trillion (that's Trillion) In Transactions Questioned; "Deferred Prosecution" On Criminal Charges; Stockholders Fined $1.9 Billion: Shares Trade Higher

Are You Starting To Get It? Are Ya?


Bubble's picture

The 1st paragraph says it all on that link Mr Whisper. They aren't just TBTF anymore, they're TBTProsecute! ABOVE THE LAW BITCHEZ. Outrageous.

Careless Whisper's picture

Bubble, you're still not getting it.  

Dr. Engali's picture

From the article:

"While the settlement with HSBC is a major victory for the government, the case raises questions about whether certain financial institutions, having grown so large and interconnected, are too big to indict"


WTF a major victory? They got a $1.9 billion pay off and they call that a victory. Maybe a victory for them in terms for their hookers and blow , but certainly not a victory for the tax payer. 


Quinvarius's picture

Expensive by what measure?  It's exchange rate is a floating data point set by central banks vs other floating data points set by central banks.  It is as expensive as any other US Dollar derivative, because that is all it is as long the central bankers are all cooperating.  All fiat is the same thing--Ambiguous, fungible mush backed by the US Fed and Treasury banker's willingness to print money to buy the derivatives to manipulate it.

bank guy in Brussels's picture

The wild card is a significant possibility of Italy's exit from the euro a few months from now, bringing down the whole euro house of cards. Spain, Greece, and Portugal would quickly follow, and maybe even France a bit after that.

The market is not pricing this in, but the momentum is there

The euro would likely continue, tho, as a northern-Germanic and actually higher-value euro, the strongest fiat currency in the world after the euro-zone fracture  ... and with the Mediterranean countries out, it is even reasonable to see Sweden, Denmark and Switzerland join the euro as well (Switzerland without joining the EU). All those countries are currently dirty-pegging to the euro anyway.


Berlusconi will be a hero for taking Italy out of the euro and ending this 'austerity' debt-slavery agony of more than a hundred million Europeans

ZH has spoken of Berlusconi's nominally low figures in the polls at the moment ... but (1) He hasn't begun campaigning yet (2) Berlusconi owns a significant portion of the Italian television media and (3) Berlusconi's party is one of 3 parties that may work together to bring down the euro, natural coalition allies

The Italians were the first to leave the 'Latin Monetary Union' in the 1800s and they may well be the ones to wreck the euro now.

Ambrose Evans-Pritchard has a great new piece, speaking of how Italian support for the euro is only 30% now - very different from Greece or Spain, the Italians are much smarter! - and Evans-Pritchard cites:

« ... a "25pc" chance of victory by the eurosceptic forces of Mr Berlusconi, the Northern League and comedian Beppe Grillo ... »

Tho I'd say the odds are better than that, that the euro will blow apart as Italy makes the big move -

Berlusconi ... Bunga-bunga ... break-up of the euro

Evans-Pritchard's last two articles in the UK Telegraph giving his superb perspective on the euro crisis

Mr Lennon Hendrix's picture

Eurocratic policy heads want a weaker currency.  After all, monetary policy 101 is to lower the value of the currency to increase the quantity of exports.  The only export nowadays is debt, and there is quite a lot of that.

The problem is Bernanke has the bigger bazooka, and he too wants a drop in his currency. 

And if we want to focus on the relationship of rates, well, rates in Europe should be much higher relative to the US, the US where it is comon practice to buy bonds whereas in Europe it is done illegally to treaty.

Ghordius's picture

It's interesting that so many people think that the ECB is currently violating Art. 123 of the Treaty of Lisbon. But it isn't

The "spirit" of 123 is about serious monetization, and that is not happening (yet)

The "letter" of 123 is btw more focused on direct financing, in that part where it's written " shall the purchase directly from them...", in the same manner as the FED is prohibited to buy directly from the Treasury and has to go through the Primary Dealers (which include China, nowadays)

Sorry, if the ECB was doing the same volumes as the FED - even for one single country - then you would have a smoking gun case of a breach of 123. Otherwise not and the ECB is covered by the "price stability" "thingie" and the historic price interventionist attitude of continental european national banks that so many commentators forget about

nevertheless, who cares, this will only become relevant when the FED will start to decelerate - note how it's accumulating serious FX for the first time since the British Pound was the global reserve currency

Mr. Lennon Hendrix, you are correct, rates should be higher in the eurozone, but this has caused just too much carry trade in the past, which is against all principles used by most of the 17 CBs that form the ECB confederation


tooriskytoinvest's picture

Money Printing & Manipulation & Cover-Up: The FOMC To Announce QE4, IMF Confirms Gold Lending by Central Banks Was SOLD Into The Market, And The True Number of OTC Derivatives Is Above One Quadrillion Dollars As Measured By The BIS!

SheepDog-One's picture

'Expensive' in what, FED Clownbux?

odatruf's picture

Exactly the right point. Or put another way, is the play to short USD now and then buy when EUR tanks?  Or is there a better option like the Swiss Franc?

Mr Lennon Hendrix's picture

Buy silver. 

You will have the benefit of any currency tanking.

Ghordius's picture

<del> one of the most annoying traits of the new generations for me is that I often misunderstand their hyperbolic language as serious

with "tank" you probably means going "a bit down", do you? How many pips is "tank", nowadays?

odatruf's picture

A fair point. I am not immune from using sweeping and hyperbolic language.

To be more precise, in this context "tank" would be a drop that falls outside a normal trading range relative to other FX, such as my example of the USD or CHF.

Ghordius's picture

may I ask how much leverage you apply? what I mean is that you do have to take that in account nowadays, imho

btw, it's my fault that I don't catch the hyperbole - I'm too used to old farts that never, ever let a word go astray

Orly's picture

"Tank" would actually mean to be set on a downward and sustainable path, such that the currency pair would violate 2 standard deviations of movement on the Weekly 4X charts.  These levels are easily seen on any 4X chart with Bollinger bands placed at 2 standard deviations from the historical price.

For instance, the EuroDollar is currently trading at ~1.30231 but if it were allowed to fall to where the real value is and not get propped up by the ECB, the Fed and use of overnight index swaps, then it could "tank" to about 1.22340, which would be a move of about 789-pips.  That's a lot of pips.  (With mini and five decimal trading, it is also called 7890-points...)

The movement in the pairs has nothing to do with the leverage the individual trader is using.  Here in the US, a 50:1 leverage is used but in some parts of Europe and elsewhere, like Cyprus, it is possible to see leverage of 200:1.  Fifty to one is more than enough, actually, but even then it doesn't matter because a smart money manager will titrate his trading plan to his account size, the number of pips they hope to make (more accurately, titrated to the pips they are willing to lose...) and the leverage available to enter the trade protected.

So "tank" would be 2 SDs on the Weekly.  Go 4X!  You'll never go back!


Ghordius's picture

ah, WFT, perhaps a repetition is necessary: gold, bitchez

and don't bet. save

IridiumRebel's picture

YES! Next question..........

Iam Yue2's picture

It will start to sell off on Thursday when it becomes clear that the SNB has no intention of shifting the cap.  The Swiss Franc, which has weakened of late, partly because of UBS measures and partly because of a punt on the cap being lifted, will firm up and head back towards 1.20.


The short term fate of the Euro will also be dictated to by the purchasing manager indices for the Eurozone, which will be out on riday and the numbers from the Ifo Institute and INSEE, which will be published the following week.

In percentage terms, one would be better shorting the Euro into Thursday; with EUR/NOK looking a nice pair.

Orly's picture

Hey!  Someone's speaking my language!

And don't forget the possible disappointment in QE4eva.  It sounds like it will come in lighter than expected, say at $20 billion in purchases as opposed to $40 billion in additional purchases.

"The Fed can, however, adjust the amount of Treasury debt or mortgage bonds it buys. The Fed could decide to buy a smaller amount of Treasurys, say $20 billion to $25 billion, to keep some ammunition if the economy slows significantly — a big worry given the fiscal cliff of expiring tax breaks and spending measures.

If the Fed buys fewer Treasurys, 'cyclical stocks would sell off if rates are not seen as being kept as low as the market has hoped for,' U.S. Bank’s Jim Russell said. "

With risk-off, it could put the Euro over the edge.


Volaille de Bresse's picture

YES it's killing us and it makes the Chinese crap we import en masse look inexpensive. 


Leave the "strong currency strong country" joke to Switzerland!

swissaustrian's picture

Depends on what the FED does tomorrow...

buzzsaw99's picture

gold is too expensive too [/2 toos]

Dr. Engali's picture

So it's the euro's turn to lead the way on the next swirl downward in the fiat toilet bowl. 

Orange Pekoe's picture

Currency with the most negative real return is the most expensive!

falak pema's picture

In the hoaxy cum steroid dopesy economy today, there is no such thing as rational thinking. Its desperate risk management in a situation where you don't know WHO (or what) will make the levitated market collapse. The hull of this ship has gotten so paper thin it could burst in a thousand places, as the hot money liquidity runs desperately looking for safe havens; like a mad moth from light bulb to light bulb with singed wings. ...

Berlu chimes?  Iran bed times? China south sea tsunami? 

The CBs can't stifle the mad, hot money plays, they can only up the ante, and hope one day sanity returns and the real economy moves truly upwards; something the past momentum denies it from happening, such be the downward pull of entropy gone viral. 

To dissipate entropy build up we need purge, but those hot shots hooked on casino markets keep believing that the next revolution is around the corner, while the CBs print, to buy time. All to save their private fortunes; all to increase the public debt. 

So all this frantic play is just a roller coaster ride where the ride itself is the finality; we ain't going any place fast; until they turn the juice off! 

Enjoy your day to day thrills. 

Is the Euro too expensive? Not if USD lost its reserve status. How long will that charade continue?

Until the world blows up or until the world shows up in DC with a hangman's knot? 

Nandos's picture

Nice to start geting short!!!

dinastar2's picture

Evans-Pritchard is 100% right: Italy has  a strong industrial structure , not only the common people but the industrialists union  COFINDUSTRIA is fed up with austerity.So the Financial power now tries to place Monti on a left-winning ticket with the Democratic party.But I see that the populist forces thanks to Berlsuconi and his 3 TV networks will do a good job.If the anti-euro camp wins it will be a unique occasion to short the Euro until the Eurozone reorganises itself with the Northern bloc which may  keep the Euro as it is and the southern bloc wich will create its own currency .But for a while Italy will be the one and only to enjoy default on its government bonds denominated in Euros and a big surplus in in tis trade balance thanks to its return to the Lira.Forza Italia !!!