Citi: Why Does The Euro Refuse To Go Lower?

Tyler Durden's picture

Contrary to most consensus views (including Citi's FX technical group) EURUSD has failed to move lower in 2014. Why?

Via Citi's FX Technicals group,

We think there are some valid arguments which fit very well with the historic dynamic seen in 1997-1998.

If so then it still remains only a matter of time before market dynamics will reach a point where EURUSD once again makes a strong move to the downside.

EURUSD long term chart

The long term EURUSD chart shows the similarities with that seen in the last USD cycle throughout the 1990’s

Both rallies were similar in length as were the background economic dynamics (housing boom and subsequent bust in the US in the early 1990’s and again in 2006-2007)

The highs came in 1992 and 2008 and the major developments that followed three years after each of those highs was a currency crisis in Europe – ERM crisis in 1995 and the European Sovereign debt markets crisis in 2011.

Within the bear market for EURUSD that came after 1995 we can see there was a decent correction up from August 1997 into October 1998 which saw EURUSD bounce 16.5%

Since the low posted at 1.2043 in July 2012, EURUSD has bounced 16% so far.

As a consequence we believe an important peak has either been put in place or is coming relatively soon which would mark a turning point that is likely to send EURUSD back to the 200 month moving average at 1.2134

A monthly close below that 200 month moving average (which has limited the three major falls in EURUSD over the past 10 years) would then open the way for much lower levels still over time (Possibly to parity or below over the next 2-3 years)

EURUSD 1995-1998 and 2011-2014 - Not identical but pretty similar


Euro monetary conditions index as at Dec 2013.

MCI: Monetary conditions index: This peaked in Aug 2012 (Loosest point of the MCI cycle which started easing in Feb 2008).

RIR: Real interest rate: Also eased dramatically since 2008 and was loosest around the same time as the MCI was at its high. It has since marginally contributed to a tighter MCI.

REER: Real effective exchange rate: Has moved down totally in tandem with the MCI. In Feb 2008 EURUSD was at 1.6020 and peaked at 1.6040 in July. In July 2012 it was at 1.2043. It hit 1.3967 (16% rise by March 2014 having been at 1.3893 in Dec 2013, the last month with this data.

It is clear from the chart above that the overwhelming contribution to tighter monetary conditions has been the exchange rate followed by falling inflation (Causing real interest rates to rise) and that Europe now desperately needs a weaker currency to help stimulate the monetary conditions gain.

After Draghi came out with the rhetoric of “we will do what is needed to preserve the Euro and it will be enough” (July 2012) EURUSD unfortunately did exactly the opposite of what was needed and has rallied 16% since that month. Now despite repeated rhetoric (In a misguided attempt to avoid action) designed to stop the Euro moving higher it remains at exactly the same level as it was at in December 2013 when the data above was last made available. (Remember 2008 when EURUSD peaked at 1.6020 and then at 1.6040 3 months later before turning)

So what can they do? As Cit explains below in considerable detail, not much . At best the psychological effect of moving from negative real rates to negative nominal rates accompanied by a statement that the strength of the EURO is tightening monetary conditions and increasing the deflationary risks might be sufficient to turn the currency lower.

There is also a sea of opinion that says a recessionary European economy with deflation and a high current account surplus is reminiscent of Japan and would likely send the Euro higher .We agree on the concerns about the outlook but not the conclusion

Japan was and is one economy with one bond market and a central fiscal system. Europe is a gathering of separate countries with different bond and fiscal systems and no fiscal transfer mechanism.


In tough times Japan tends to act together like “Japan Inc.” while Europe gets territorial and Nationalist


Japan’s current account surpluses were Japan’s surpluses. Germany is the primary surplus nation in the Eurozone and it is not likely to be “gifting” those surpluses externally anytime soon. When it comes to the periphery recent surpluses are more to do with falling imports than economic health.


Japan has one banking system. Europe cannot even agree on a pan European bank deposit guarantee system.


As the backdrop deteriorated in Japan they moved to a QE approach which they have revisited recently but they did not default despite rising debt levels and financed that debt predominately internally. When the backdrop deteriorates in Europe they “take your money” through default and deposit confiscation. (Neither of which policies they rule out going forward). This default without devaluation fails to economically stimulate especially as it is accompanied by austerity measures.


This suggests that the Euro goes down as part of the solution (Good weakness and our preferred and likely scenario) or as a renewed part of the problem (Bad weakness, economic and political fragmentation, social discord, haircuts and confiscations which would almost certainly result in the ultimate demise of the Euro). This is neither our preferred or expected scenario but more of a tail risk event.


We are no less convinced than we were at the start of the year that EURUSD is going to head much lower over the coming years

We anticipated this move would already have begun at this stage yet we sit at almost the exact level where we closed 2013

We believe the “day of reckoning” is not far away and that as detailed above the building blocks are now falling in place. We may have already peaked with the marginal new high posted at 1.3967 this month but either way we are skeptical of any sustainable move over 1.40 materialising and still believe that we may see EURUSD much closer to 1.20 than 1.40 before this year is behind us.


Full note below:

Weekly Roundup - Why Does the EURO Refuse to Go Lower 1440391-2

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DoChenRollingBearing's picture

Add up all the gold in W Europe, they have more than the USA does.  If the stats are true.

Maybe that explains something, maybe not.  I sure don't know.  Europe is expensive!

Remington IV's picture

EZ is collapsig right before our eyes

philipat's picture

You don't suppose that it might have something in connection with the fact that the ECB is the only major CB which is NOT printing fiat 24/7?

PS. Only because Germany refuses to allow them to do so.

PPS. Any Public recommendation from ANY TBTF should be taken as the opposite of what will happen in fact. It's all Muppetology.

Singelguy's picture

I highly doubt that there is any central bank in the world that is NOT printing. They have no choice. If the ECB was not printing, the euro would continue appreciating relative to other major currencies, making their exports expensive and uncompetitive and in turn seriously damage their economy. I would agree that the ECB is printing at a lower rate. Germany is opposed to it but I am certain that the ECB has found a way to do it that does not violate its mandate or ruffles Germany's feathers.

Max Hunter's picture

@ philipat ... BINGO !! Take into consideration the EU have the same size economy (relatively) without the added Military expenditures. Not to mention, because of German stubborness, the FED is doing the bailing out of both EU and US.. I wouldn't be looking for natural causes to bring the EUR/USD down.. of course, manipulation is a powerful thing.

Manthong's picture

WHY ?????

Because the Fed wants the dollar lower and they have floated the whole freaking EU banking system with tens of trillions of Benny bucks in opaque swaps.

If you could audit the Fed it, all would become clear.

But ha! ha! sucker, you can't.

MrSteve's picture

What part of "Whatever it takes" do we not understand?

Japan is still at one-third of its 1989 Nikkei peak. Southern Europe is broke, broker, brokest; USA has blown off GAAP & FASB for marked to model unreality and China is blowing yuan at 4X GDP compared to US FED's modest counterfeiting. The world is awash is depreciated fiat because the debts are unobtainably un-repayable. The global financial crisis has morphed into the global currency devaluation circus. Venezuela and Argentina are leader board's top basket cases, per usual.

Commodity prices give some indication of things to come, if the handwriting on the wall is too confusing.

Open question: What's better than EUO for playing the dollar -euro game?

Rafferty's picture

"Only because Germany refuses to allow them to do so."


That is most certainly true.  Were it up to the Club Med the ECB would be printing like Janet on steroids (assuming she's not on steroids already, which, on appearances alone  is certainly open to question).

zaphod's picture

Lower compared to what? The dollar which is being printed at the rate of nearly $3B per DAY?

The Euro is going lower against real assets, just not the dollar.

sessinpo's picture

 zaphod      Lower compared to what? The dollar which is being printed at the rate of nearly $3B per DAY?

The Euro is going lower against real assets, just not the dollar.


If the dollar is being massively printed (which I do not disagree), compared to the Euro, would it not logically be more valuabe compared to the dollar?

I think the real reason is that all areas are facing broad based deflation with only pockets of inflation in certain places (such as food). Cash is king because the debt level is so high everywhere.

1fortheroad's picture

Cause we Have a very Merry Barry



I like this edit button

FieldingMellish's picture

Squiggles on paper. Stop guessing which currency is heading to zero faster. The destination is the same regardless of the order of arrival.

assistedliving's picture

not when you gotta buy euro's to pay for equipment u bought three months ago due for delivery in July.  F*#ed myself but wondering if i shd hedge now

Jaspergers's picture

Which is the best looking horse at the glue factory?


EmmittFitzhume's picture

Maybe it's because wall street is too busy beating the shit out of the Yen to focus on the euro

ebworthen's picture

Parity with the Dollar at least.

Friggin' ridiculous.

Ludwig Von's picture

ROW is now bigger than US. Dollar is history.

Sudden Debt's picture

looks like they cust their marketing budget to buy "proffesional" pictures.
fluo gifs? come on!

Haager's picture

1.36x followed by 1.40x-1.43x I'd say here. ECB will make it happen...

Magnum's picture

In my line of business almost every piece of required machinery comes from Germany.

Iam Yue2's picture

Sometimes, you really miss Stolper.

gwar5's picture

Rickards had a good explanation why the EUR is not going down but I forgot what he said about that. I forgot the link, too.  Nevermind.


gwar5's picture

OK...  I remember some of it now.

Something about them having already done more restructuring than Japan and the US.  But frankly I don't see it, unless he means Cyprus and recent such EU steps towards Cyprusing all of Eurolandia. I see that as step closer to major chaos. 



TPTB_r_TBTF's picture

The Fed creates dollars and gives them away to Europe.  Europe then takes those dollars and exchanges them for Euros which bids up their own currency.

Clowns on Acid's picture

Better to just forget it...

CrashisOptimistic's picture

Brent is $109ish.  If the Euro went lower, they could not pay for it.

LetThemEatRand's picture

Bingo.  Putin is Saudi Arabia without the hats.  He knows this.

sessinpo's picture

LetThemEatRand    Putin is Saudi Arabia without the hats


Worse then that. Many Saudi oil wells have passed or are near there peak production. Russia's are not. Obama went to Saudi to ask them to stay on the petro dollar standard that Putin is trying to break with China as an ally. This is also part of wwhy the US and England confiscated Saudi gold held in london.

kaiserhoff's picture

I see your point, but the price of gas is about half taxes in the States.  Must be 80 percent there.  Adjustments could be made, but Southern Europe might be in real trouble.

Schmuck Raker's picture


"This suggests that the Euro goes down as part of the solution (Good weakness and our preferred and likely scenario) or as a renewed part of the problem (Bad weakness, economic and political fragmentation, social discord, haircuts and confiscations which would almost certainly result in the ultimate demise of the Euro)."

Well, that bolded part certainly seems inevitable. Timing this stuff seems to be a sucker's bet though.

agent default's picture

Just wait for the EU elections in May.  With the eurosceptic looking at something like 20-25% of the vote. 

disabledvet's picture

I really don't care about this shit anymore.

"War inside Putin's head." That strikes me as the only game in town.

Notsobadwlad's picture

Why? Because there are no free markets. The price of eveything the banks touch is absolutely controlled through their control of money creation and distribution and their control of markets.

This disease will not be healed until the power to control markets is taken away.

gorillaonyourback's picture

I believe its secret swap agreements between the zionist controlled central banks. US Fed secretly print dollars , euro central bank secretly print euro they SWAP with the agreement to buy each others bonds or currency.

Lokking4AnEdge's picture

If the Russians, Chinese et al continue to diversify away from the US Dollar the Euro can and will continue to appreciate.....

Everybodys All American's picture

The Forex market is rigged just like everything else and if you believe that the NWO EU crowd is going to let the Euro die you're crazy.

Ifigenia's picture

Why Does The Euro Refuse To Go Lower? because our ECB print less than US FED

TPTB_r_TBTF's picture

Or because Europe is losing the Currency Wars.

StychoKiller's picture

You just stated that the ECB is printing less in a different manner.

syntaxterror's picture

I guess the US Dollar isn't the "cleanest dirty shirt" after all in the fiat shit show.

hunglow's picture

But our horse still looks best in the glue factory.  NEXT!

orangegeek's picture

Euro daily has rolled over and showing downtrend.


The Euro weekly has topped and rolled too.


More downside for the Euro is likely - more upside in the USD also likely.

Marco's picture

A pan European deposit guarantuee system in the traditional sense is stupid unless it's backed by the full faith and credit of the ECB ...

US/Japan have a true central government which will always have backing from their central banks, that's what gives the deposit guarantuees their value ... not the tiny insurance fund, not even the full faith and credit of the government itself, but the printing press is what makes the deposit guarantuees worth a damn.

Cyberg's picture

I do't care about the euro no more...

don't need to go to Amsterdam no more...



MarcusAurelius's picture

Nice conclusions and fundamentally sound. In simplicity the Dollar is bottoming too and is ready to stage a nice rise. I have been short the EURO for quite some time as I saw these things taking shape regardless of the short term stop hunters. I have a short signal which has yet to take a loss. 

  What concerns me most is the fact that everyone is sure of this decline over the last two weeks or so. I never like to see too many people on one side of the boat even though in this case they may be very right over the long term. 

falak pema's picture

surrogates don't have choices...and Draghi is there to watch.

Soul Glow's picture

It is because the dollar has more room to manuver than the euro, so the Fed will send the dollar lower, and lower, and lower....