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Euro Strength? A Mystery No More

Tyler Durden's picture


In October of last year, when the last European crisis risk flare was peaking, we explained in gruesome detail the paradox of Euro strength in the face of crushing fundamentals - namely repatriation (or as BofAML calls it 'deleveraging'). Since the crisis hit in early 2010, EURUSD has average 1.35 - about 11% above its historical average - and in PPP terms, EURUSD has been overvalued by an average 18% during the crisis (over 8% above its overvaluation since the Euro was introduced). The mystery is over. Just as we said, it is bank deleveraging, as evidenced by the chart below which shows a massive $4 trillion (or 42.8%) drop in Eurozone banks' foreign assets since the peak in early 2008. At the same time the reduction in foreign bank claims from the Eurozone over the same period was only $0.4 trillion. As BofAML note, 'even if some of the Eurozone’s bank claims were not converted back into euros, these magnitudes are large enough to suggest a strong positive impact on the euro.' The concern remains that the recent weakening of the EUR has to do with increased risk aversion, the deterioration of the Eurozone crisis, and global policy uncertainty as they suggest in the short-term the worst of the deleveraging may be over thanks to ECB bank support measures - but with such a vicious circle of flow, the squeezes could be painful if the paradox of further crisis escalation hits and drives EUR stronger on these deleveraging flows starting again.



Source: BofAML


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Thu, 07/12/2012 - 09:15 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

You don't say. Weird how that works.

Thu, 07/12/2012 - 09:30 | Link to Comment gmrpeabody
gmrpeabody's picture

So..., down is the new up?

Thu, 07/12/2012 - 11:25 | Link to Comment Stock Tips Inve...
Stock Tips Investment's picture

The huge rescue programs in Europe and the (artificial) low interest obviously are affecting the value of the Euro. We sometimes forget, but the value of a currency, finally, always depends on supply and demand. Who wants to Euros?

Thu, 07/12/2012 - 09:36 | Link to Comment Monedas
Monedas's picture

Please put some hemorhoid cream on your Avatar .... it's painful to look at !

Thu, 07/12/2012 - 09:17 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Duh, more deleveraging to come no doubt.  This is how you "muddle through", until you collapse.

Thu, 07/12/2012 - 10:01 | Link to Comment TruthInSunshine
TruthInSunshine's picture

I can't tolerate the idiocy anymore.

At this point, the only thing that can keep the EU together, in any way that even remotely resembles what it did, is a dramatically weaker euro.

Only by reseizing comparative and competitive markets to produce goods appropriate for export can the particularly ravaged and de facto bankrupt/insolvent PIIGS be kept in the EU, as only this will make it possible (although by no means a certainty) for those servicing their debt/deficits to continue doing so, especially if they are repaid in euros (even a dramatically devalued one, which may at least be accepted, versus drachma, peseta or lira).

If the euro is not devalued significantly, there simply is no way that the EU can survive as an ongoing union in anything that even remotely resembles its past structure, and in fact, many countries will be forced to leave when they no longer have access to borrowing to fund deficits and debt interest payments, thereby defaulting to the ability to print their own currencies again, while others will choose to leave in order to preserve an inflationary nightmare (i.e. Germany and a few other northern nations; some say significant euro devaluation will pressure these nations to leave for the same reason of high inflation, but that's a tightrope that can theoretically be successfully walked, if the goal is to preserve the common currency of the EU - I'm not saying this is likely, but just more likely than if the euro is not significantly devalued).

Thu, 07/12/2012 - 10:02 | Link to Comment Joe Sixpack
Joe Sixpack's picture

Germany can accept a lower euro because they are an exporting country. This makes their products cheaper.

Thu, 07/12/2012 - 12:02 | Link to Comment The Reich
The Reich's picture

Not within Europe!

Thu, 07/12/2012 - 10:04 | Link to Comment eddiebe
eddiebe's picture

Well, yes, or the banksters just change the rules, and start issuing Eurobonds, and start playing the same game the fed. has been playing.

Thu, 07/12/2012 - 09:18 | Link to Comment MFL8240
MFL8240's picture

This is funny!  Nothing was fixed in Europe and the paper currency is now going higher?  Sort of like the USD toilet paper.  This global fiat sytem is one for the record books.

Thu, 07/12/2012 - 09:39 | Link to Comment dexter bland
dexter bland's picture

Well you can't wipe your ass with gold.

Can't do much at all with it 'cept pass it off to the next guy, hoping for a thicker roll of toilet paper. But lately it hasn't been working out that way. If your bowels are still functional you need to hang on to your toilet paper.


Thu, 07/12/2012 - 09:47 | Link to Comment Curtis LeMay
Curtis LeMay's picture

Soon you can. It's down to 15 hundred and change.

When there's nobody affluent enough to buy it, then what??

Thu, 07/12/2012 - 09:50 | Link to Comment LawsofPhysics
LawsofPhysics's picture

People will work for those who have it.  Sorry, did you have a point?

Thu, 07/12/2012 - 14:39 | Link to Comment Curtis LeMay
Curtis LeMay's picture

Yeah - build a bunker and stock it...

Thu, 07/12/2012 - 09:52 | Link to Comment Bokkenrijder
Bokkenrijder's picture

"Well you can't wipe your ass with gold."

Well, actually: you can!

Thu, 07/12/2012 - 09:20 | Link to Comment ParaZite
ParaZite's picture

They *aka the 1% / elite* are pulling out all the stops to make the fiat system last long enough for them to drain the worlds wealth like a gay man's prostate at a Greek bathhouse. 

Thu, 07/12/2012 - 09:53 | Link to Comment agent default
agent default's picture

The 1% is trying to avoid a lynching in a few years time right now.

Thu, 07/12/2012 - 09:20 | Link to Comment timbo_em
timbo_em's picture

Damn, now Obama can increase US exports only by 80 percent by 2015. The 100 percent that he once had in mind seem to be overly optimistic.


Thu, 07/12/2012 - 09:23 | Link to Comment silvermaister
silvermaister's picture

buy silver


Thu, 07/12/2012 - 09:31 | Link to Comment DeadFred
DeadFred's picture

Silver is sitting 2% above long time support. Gold is close. The euro is on trend line support. The Swiss have been printing heavily fo many hours. And it seems that the 50day averages that helped equities yesterday are now dim memories. This is looking to be an interesting day.

Thu, 07/12/2012 - 10:09 | Link to Comment eclectic syncretist
eclectic syncretist's picture

If you truly believe in silver this is a good place to buy between $25-$26.  It could be a Richard Dennis-esque type of trade IMHO.

Thu, 07/12/2012 - 09:32 | Link to Comment GetZeeGold
GetZeeGold's picture



Silver is is just barbaric.


Thu, 07/12/2012 - 09:56 | Link to Comment agent default
agent default's picture

Both gold and silver are barbaric.  Tenured professors of economics, now that's classy.

Thu, 07/12/2012 - 14:35 | Link to Comment Curtis LeMay
Curtis LeMay's picture

No. Buy cement and rebar - and do something "constructive" with 'em - like save yourself and your family...

Thu, 07/12/2012 - 09:25 | Link to Comment Everybodys All ...
Everybodys All American's picture

Deleverage ... sounds so much better than covering their financial losses.

Thu, 07/12/2012 - 09:30 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Just wait until the American banks start deleveraging in earnest.

Thu, 07/12/2012 - 09:26 | Link to Comment betterlockaway
betterlockaway's picture

Reverse arbitrage bitches.  Sell dollars low and buy back euros higher.  Brilliant.

Thu, 07/12/2012 - 09:28 | Link to Comment mess nonster
mess nonster's picture

Internal bank runs fool algorythms into risk-on strategies. EURUSD strengthens as a perverse sign of internal disintegration. Has anyone coined a term for the deliberate fooling of computer logic? After all, algos are a form of logic circuit, and "garbage in, garbage out" would stil apply, would it not? How does robo-trading work in a financial world where there is no truth to anything. Wouldn't computer-driven trading only magnify the distortions intitiated by lying, cover-up and general tom-foolery?

Thu, 07/12/2012 - 09:29 | Link to Comment eddiebe
eddiebe's picture

When we look at the COT reports we see the commercials very long the Euro. This means to me that the banksters have long term plans for the Euro to rise. Since the commercials basically are the banksters, or act on behalf of the banksters, they control the markets and by defintion have foreknowledge of what will be. My guess is that at some point in the not too distant future, the spotlight will be on the Dollar and it will be painted red.

This is one of the ways the banksters bleed off liquidity from the markets right into their own swollen coffers.

Thu, 07/12/2012 - 09:43 | Link to Comment LoneStarHog
LoneStarHog's picture

And...the COT Report - Uh! Issued by the credible CFTC with input from the credible banksters - is the ONLY credible/honest goobermint report because?

Thu, 07/12/2012 - 10:08 | Link to Comment eddiebe
eddiebe's picture

You make a good point, Lone star, but then somebody surely with very deep pockets is taking the other side of the trade.

Thu, 07/12/2012 - 09:43 | Link to Comment Monedas
Monedas's picture

Complete the hoarding phase .... and be a "porch nigger" with Monedas !  I saved you a rocking chair, a jug of hootch and a fly swatter .... "who could ask for anything more?" (Berlin or Gerschwinn .... take you're pick !) !            Monedas     1929       Comedy Jihad Hoarders Have More Fun Than Dizzy Blondes

Thu, 07/12/2012 - 09:44 | Link to Comment Orly
Orly's picture

A large long Gartley pattern has formed on the EURUSD Daily chart.  The pair could close the pattern to the upside at about the 1.31 level, closing the gap on the Daily chart from May sixth.

Whiplash smile.


Thu, 07/12/2012 - 09:58 | Link to Comment Monedas
Monedas's picture

Have my posts improved .... since I've been hitting the Czech absinthe ?

Thu, 07/12/2012 - 11:44 | Link to Comment smiler03
smiler03's picture

Well it's clearly getting to you as you have at least three posts in this thread without your trademark "Comedy Jihad "

Thu, 07/12/2012 - 10:04 | Link to Comment ebworthen
ebworthen's picture

Parity, parity, parity!

Global race to currency devaluation, Euro first, then the Dollar.

"King Dollar" is Louis XVIth.

Thu, 07/12/2012 - 10:06 | Link to Comment Monedas
Monedas's picture

Let's parity ?

Thu, 07/12/2012 - 10:47 | Link to Comment Bastiat009
Bastiat009's picture

Euro strength has been replaced by US$ strength not by gold ... does that make Bernanke a hero? 

Thu, 07/12/2012 - 10:54 | Link to Comment Shizzmoney
Shizzmoney's picture

At this point, the only thing that can keep the EU together, in any way that even remotely resembles what it did, is a dramatically weaker euro.

Right.  Since Germany is the breadwinner of the Euro, the Euro needs to reflect Germany's need if it is going to be the creditor for all of these fail nations.

And as we know here in the United States, weaker currencies favor corporations and their import/export costs. 

Now, of course, this will eventually kill the wages and savings of workers.  Unless, you can speed up enough growth.  But under one currency, this is easier said than done.

Krugman on CNBS was actually right in something yesterday: The fail from the Euro was via the fact they tried to construct one currency without one government.  He basically, in a backdoor way, suggested the Euro needs to be broken up (and I doubt he'll admit this in public b/c his masters, who pay his way, DO NOT want this) because Germany's needs should not dictate Spain's needs, and vice versa.

The only way out of currency crisises is sovereignty.  This is what saves the EU trading union

Rentiers do not, however, make money on sovereignty. 

Thu, 07/12/2012 - 12:07 | Link to Comment falak pema
falak pema's picture

eur @ 1.219 nearly at its historical level of 1. 18 in jan 1999. As long as the banks survive this is good for eurozone. But will the Spanish and Italian banks survive? Not with ESM @ 500B.

Merkel still has to make key call, and it don't look good.

Roller coaster like on a mad Tour de France 2012 downhill stage in the Alps.

B. (W)Higgins is playing at pygmalion to yellow jersey; his pretty woman of my fair lady!  

Thu, 07/12/2012 - 14:34 | Link to Comment GOLDTEETHSILVER...

Follow the yellow brick road...

Thu, 07/12/2012 - 16:54 | Link to Comment Djirk
Djirk's picture

Could be cause ECB lowered rates....a higher interest rate backstopped by the ECB was too hard to resist, but now that has changed....

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