Presenting Six Views Of The EUR

Tyler Durden's picture

As EURUSD leaks very gently lower into the new year (but stocks popped excitedly across quiet European markets that lacked a bond market supervisor to keep them honest), we thought it might be interesting to look at the relative strength of the Euro against six different measures. From FX option risk-reversals to ECB's European Bank Lending statistics, QE and sovereign risk relationships to Fed/ECB balance sheet dynamics, and finally from futures commitment of traders data to EUR-USD swap spread frameworks, the results are unsurprisingly mixed with a bias towards EUR weakness.


1. This chart shows the relationship between EURUSD option risk-reversals (a complex way of saying investor's bias towards puts or calls). The last few weeks has seen the risk-reversal (bias) shift 'bullishly'. Now back 'in line' with its longer-run relationship we call this one EUR 'neutral' but can't help but see a trend of modest bullish EUR evolving.

The next three charts all relate to the dynamics of the ECB and Fed balance sheets...

2. The relationship between ECB's balance sheet lending to European credits (black) and the EUR has been discussed a number of times recently and suggests further EUR weakness.

3. The Fed's QE2 program had an interesting impact on the relationship between EURUSD and European Sovereign risk (in this chart shown in black measuring the GDP-weighted-average spread of the 17 European nations). During non-interventionist periods (fewer and fewer recently), the two correlate very highly which given the current environment would suggest a weaker EUR perspective. If the periods 1, 2, and 3 are investigated standalone - the fit is incredibly close - and then the QE rumor and news periods dislocate the dependence.

4. Aggregating across the Fed and ECB's balance sheet, we see the now-familiar highly correlated 'chart-of-2012' that points to significant EUR weakness in the short-term as the ECB implicitly prints (via LTRO). This of course then infers a reaction by the Fed (to 'weaken' the USD) especially in an election year given its correlation-impact on US equities.

5. Moving away from more fundamental based drivers of the EUR vs USD relationship once again, we note the now all-time record high net short interest in EUR futures (commitment of traders) - which until we see a turn is not bullish for the EUR (in a contrarian way) and in fact points to further EUR weakness (perhaps the levered futures market is front-running the much bigger real-money exit that would drive the EUR down?).

6. And finally, we look at the swap-spread model that has been a main-stay of relative-value trading for a considerable period. By tracking the entire swap curves of EUR and USD, we find a strong relationship (which makes fundamental sense obviously in terms of rates) between this model and the market's EURUSD rate. This relationship saw a EURUSD depreciation and rally-convergence in September 2011 and we are once again at about the limit of the model's disconnect (green histogram). The last few days has seen the swap spread model starting to push higher and this framework would suggest a positive EUR bias (we would prefer the RV trade as opposed to outright though).


So in summary we have FX options that have a EURUSD neutral bias (with maybe a hint of EUR bullishness), Swap spreads that have a EURUSD positive bias, EUR Futures Commitment of Traders data that suggest EUR weakness (though arguably that is the pain trade and EUR strength is more contrarianly likely), two central bank-related indications that we should see further EUR weakness, and sovereign credit spreads that further suggest EUR weakness.

[We can't help but see a case for EUR strength from this data - FX options vol biasing higher, swap-spreads biasing higher, and futures shorts way over their skis? this is balanced against sovereign risk weakness and central bank dynamics that suggest EUR weakness]

Of course, all of this depends on the words that come out of Bernanke's mouth on the 24-25th of January (though we suspect without considerable economic malaise in the next two weeks, a major LSAP announcement would be hard to justify). Of course, the next two weeks have some rather worrisome (in size and origin) supply and redemption issues for European sovereigns and judging by last week's sovereign credit risk performance, bond markets are not excited about it.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
zorba THE GREEK's picture

The Euro looks doomed no matter what angle you view it from.

achmachat's picture

my angle is: I try to get rid of all € as they come in, except for what I need to pay bills and food etc.

been doing this since an entire year now. Not more fiat at this place than really needed.

I sleep well at night.

GiantVampireSquid vs OWS UFC 2012's picture

All currencies are in a race to the bottom, not that there is actually a bottom, just add another zero and viola!  Real life participants have disappeared, all that is left is the unholy trinity of Banks, Central Banks and Government.  Once you controll all three sides of the game, you can keep playing for ever.  No need to default if you can just borrow more.

Eally Ucked's picture

No, no, at some point you have to use your fingers to cover excess of zeros because you dont even know which bill to use. At that point they change currency. Just wait. 

GiantVampireSquid vs OWS UFC 2012's picture

Yep thats how the Ponzi resets, and you have to laugh cause they'll do it all over again.

constitutionalist's picture

wait a minute, i think i have a friend doing this, you mean using credit cards to pay off credit cards, and then using more credit cards to pay off credit cards, then apply for more credit cards to pay off credit cards. seems to work for him, he doesnt sleep much though, but i think i see a pattern

CrazyCooter's picture

They will just adopt scientific note-ation ... LOL!



fredquimby's picture

I bought my old man the zimbabwe note pack for xmas......the one hundred trilllllllllllllion dollars looked great!

Dan The Man's picture

I have ONE far so good.

RobotTrader's picture

Looks to me that the Euro, gold, silver and Aussie dollar have bottomed and there is going to be yet another rally to throw a monkey wrench into the bear camp.

disabledvet's picture

the simplest way to me is to look at the US dollar and what happened when the Fed QE'd: it plunged. I see nothing to prevent the euro from doing that myself--moreover i see nothing in the short term to keep the BofE from continuing its policy of QE'ing as well. Prices are plunging and should their be a bank run in Europe...which is quite likely i might add and with or without from just a political standpoint cause the French banking system to be nationalized...then the world's second largest economy (the EU) will be off-line for the forseeable future. This will put massive downward pressure on all commodities across the board...especially if this deflation spreads to the USA as is likely. The Aussie dollar is barely a currency so i'm having a hard time getting excited over that trade. Gold and silver miners have been getting crushed...a bank failure of the likes of BofA will put an enormous amount of pressure to start turning that mass of rock into something that can be monetized--in the meantime prices will come under enormous pressure as a consequence. the simplest trade still seems the most profitable: play the MASSIVE btu spread between oil and nat gas by going long the consumers of nat gas and short the consumers of oil and its derivatives. that would mean long nat gas utilities (WEC), nat gas tech (GE, United Technology), and nat gas "profligates" (chemical companies like Dupont which require massive amounts of energy to run their operations) and short the gas hog autos (Ford, some extent GM but it's government owned pretty much so you have to be careful), road resurface companies like Martin/Marietta and of course National Governments themselves which simply have no plans for dealing with a world without need for oil slavery (Iran, Saudi Arabia, Libya, Iraq, Venezuala, etc...etc...)

StychoKiller's picture

You type that like it's a good thing -- decrease your dosage on the Koolaid...

TheSilverJournal's picture

I actually agree with you on this one.

No big country (Spain, Italy) will be allowed to default because otherwise the money printers lose control of their printing press with a breakdown of the banking system and currencies. The risk right now for Europe is the failing of the currency, so with pumping in more easing, the Euro will go up.

tabasco71's picture

Makes perfect sense - the USA & UK have become so completely comfortable with printing of late - the brakes are off and they aren't even ashamed about announcing a further round these days.

Although to be fair, with Europe representing c.45% of world GDP, the USA and China can't afford for it to freeze up or disappear (despite its best ongong efforts to achieve this).

TheSilverJournal's picture

If the Euro fails, then the dollar fails because all of the banks are so interconnected. 

The entire world would be better off if the printing stopped because resources would once again be allocated more correctly. The problem is that there's not enough will / public understanding that it's worth it to clear the malinvestments in order to allow resources to flow to more productive areas.

Dr. Gonzo's picture

Platinum bottomed on Thurday morning also. 

chump666's picture

Thin and gappy trades. Tight HFT spreads. it's a market going nowhere. Bernanke/The Fed the Loons at the ECB still can't juice the market and they are ALL printing like mad.  So, volatility and huge swings on the downside should get the rhetoric going.  But even then, good for a week of bull traps.

2012 pain trade real close now

GiantVampireSquid vs OWS UFC 2012's picture

The markets ceased to indicate anything a long time ago.  Even the dumb money is leaving the table.  I wouldn't bet on a crash, there is too much at stake. 

Errol's picture

Squid, I agree.  In his famous "Making sure 'it' doesn't happen..." speach, Bernanke mentioned that the Fed is authorized to buy many kinds of assets, which would certainly include common stocks.  Keeping the stock market levitated prevents the collapse of pension and insurance portfolios, about the only way he has of transmitting newly created dollars to the middle class.

chump666's picture

there is too much faith in money printing to elevate equities.  You get meltups, but our markets have all hit a brick wall.  ZH and others have shown the huge amounts of money printing going on, as the FED has already started QE3 with the swap lines to ECB. 

And the market aint moving much.

2012 is going to feel like the end of the world

GiantVampireSquid vs OWS UFC 2012's picture

Think of it this way, the few remaining market participants have been trained like a dog fetching a ball.  Bad news ramps stocks because it means QE, good news is like when you pretend to throw the ball, but don't.  The dog starts to chase it, but soon realises you didn't throw the ball.  Also a falling stock market means QE, with a guaranteed QE no matter what, most are reluctant to sell.

Maybe there will be a massive collapse in stocks, but I guarantee they will not stay down for long.  Unless you know of an unbreakable law that can prevent Helicopter Ben from creating more money?

chump666's picture

Probably the commodity complex collapsing...that could happen if China and India just fall off a cliff.  I think China is the wake up call from hell.  I agree, swing trades on the highs and lows but that is volatility.  The Goldmans of the world won't get that free money or 'no losses 2009' rallies ever again.  This is how dumb they are and why they are sh*t traders.  Ben Bernanke if printing now, admittedly op twist and swaps aren't going to POMO trades.  But...we shall see what 2012 holds.

What will hold ben/ECB/Fed/IMF down?  Oil price.  They won't officially print if they send oil back to the doom range of 140+ ...and equities (sell) decouple for oil (bid)???  Scary.

chump666's picture

as i wrote this from wires (trader in asia):

USD/INR gaps lower at the open to 53.25 from the close at 53.30 yesterday, in line with spike in the EUR. The pair slipped to low of 53.11 but has stalled since as buying interests surfaced. Higher oil prices to add to inflation concerns in India, with oilers bids seen supportive of the pair ahead of 53.00 support.

tom a taxpayer's picture

As of 12:15am EST, oil is up to $100.57 (on Over the past few weeks whenever oil creeps above $100, TPTB play Whack-A-Mole and pound oil below $100. Will today Jan 3 be another Whack-A-Mole?

Update: of 12:26am EST oil is down to $99.06 (on

GiantVampireSquid vs OWS UFC 2012's picture

You're right, and I have been wondering how they will bypass that "smoking gun."  I'm sure they will come up with something, maybe blame peak-oil, speculators or Middle East "tension."  Or maybe it will hold them back.

Definatly the right thing to happen is a massive crash, purge the system etc.  The more I look into it though, there seems to be no limits to what they will do.  So now I view it this way, IF I had all the resources, all the money, all the support, could I come up with a way to hold things together?  I'm not that kind of guy, but I'm pretty sure there are ways, and the laws of economics are not unbreakable like the laws of maths, and physics.

HarryM's picture

Can the Fed buy physical assets ie place orders for durable goods then stock pile them, thus create new jobs

GiantVampireSquid vs OWS UFC 2012's picture

They prefer to finance "Destructable Goods" that way there is always a demand for them, like Tanks, Missles, Guns etc.

chump666's picture

everything comes to an end.  Nothing stops that.  Any can kicking into 2012 won't do anything, hasn't really done anything anyway.

So, prepare.

fonzanoon's picture

Some more people will go broke this year. But they will stop counting some more of the people in the system that went broke a few years ago. So it will look like the economy is the same even though it is just getting gradually worse. The key however is to focus on the coming recovery which has to be right around the bend

Goldilocks's picture

Speaking of sovereigns...


I am with the…  “Johnny Lunchbucket”

Ken Adachi, Johnny Lunchbucket, & Don Nicoloff Dec. 23, 2011: The Sovereign Man v. Equity Courts. Part 2 (MP3) (Johnny interview begins @28:00)


& a good movie…

Catch Me If You Can

Courtesan: Endorse it over to me.
Frank: No. I couldn't do that. See, this check is for $1,400. We agreed upon $1,000.
Courtesan: Why don't I give you back $400 and you give me that check?
Frank: Even better.

XtraBullish's picture

The Euro is doomed? You have more toxic garbage "Ponzi'd" by the U.S. Fed than anywhere on the planet and the PetroCurrencies all know  this to be true. The Canucks sure know it. Anyone who actually BELIEVES that the world is uber-US$-bullish because of the relative "fiscal responsibility" of the Yankee policy-makers needs to take some Windex to them rose-colored glasses. The U.S.$ is going to zero as soon as the thieves have bought all of the gold they deem necessary in order to survive the hyperinflationary shitstorm. 

StychoKiller's picture

Tradin' green stamps for Au/Ag...priceless!

Falcon15's picture fiat for toilet paper: WINNING!

split4to1's picture

The EUR/USD option plays and risk-reversals can only do so much EUR/USD

pebblewriter's picture

From a technical standpoint, EURUSD is in a wicked steep declining channel on its way to completing a crab pattern that started on Oct 4 and will get to at least the 1.618 extension at 1.2464 and probably the 2.618 extension at 1.1362 as early as Feb 1.  At that point, it bumps into a 7 year-old falling channel that should at least cause a significant bounce.  A reverse off 1.3033 in the next 24 hrs should get the next waterfall started.


ACP's picture

Not a problem! Madman Ben will keep buying the euro until it's worthless.

Then, crash like May 2010 or August 2011. It's the new normal.

gwar5's picture

6 degrees of separation between the Euro and Kevin Bacon:

The EURO goes to shit > Germany back to high Deutsch Marks > Germans can't sell BMWs > BMWs can't sponsor American TV > TV shows cancelled > Kevin Bacon forced out of retirement and must make Wild Things II


chump666's picture


Best post for far!

Very funny.

SmoothCoolSmoke's picture

Since this was posted, EUR stright up 60 pips.

chump666's picture

capped at 1.30

just a HFT meltup awaiting momos.  DAX went bid too early 2012, should sell on the open, hence the EUR will sell off.

steve from virginia's picture


The problems with the euro are not between it and other currencies, it is between the German 'version' of the euro and the other European nations' versions.

Printing or devaluing the euro is pointless b/c the various iterations all change 'value' together.

The EU can either preserve the euro or it can save its banks from insolvency, it cannot do both at the same time. The ECB liquifies bank balance sheets but the fact of it compels depositors to flee. At some point there is no capital. Then what?

Meanwhile, $107 crude is bleeding debt service out of the Eurozone. There is just as much 'output' from $20 crude as with $120 crude. The difference is a tax payable to Saudi Arabia.

More importantly, the so-called output of Europe's industries represents no real return. Nothing in the EU actually pays for itself. What Europe 'earns' is simply credit expansion on a gargantuan scale.

Regardless of what the bosses say, the EU is bankrupt. The US is simply the tallest mast on a sinking ship. It will go underwater last.

tom a taxpayer's picture

steve - I like this analogy "the tallest mast on a sinking ship". Seems more apt than "best horse in the glue factory" and other analogies.

Any thoughts on Petroplus problem? 

chump666's picture

look at how whacked out euro markets are...CAC neg DAX in lala land as oil goes bid.  Germans hate a high oil price.  its Europes Jan last gasp.  be interesting to see US markets reaction.  might slam some reality into the mix.  seems like everyone fudged their PMIs after the China fudge.