Even as futures cruise happily along well in positive territory, the EURUSD has once again decoupled from risk (funny how that always happens when the EURUSD is sliding, rarely if ever when it is surging on short covering). What is the reason for this latest schism? According to Citi's Steven Englander it has all to do with Europe once again aligning itself with Obama, and against China, which the market has recently been viewing as a white knight for Europe (contrary to repeated evidence otherwise). As a reminder, China made it very clear last September [4]that it will (somehow) save Europe, if however Europe no longer pursues trade actions against it. Well, Europe just announced it would join the US in the WTO case against China on rare earth metals. Sure enough, China is about to pull the carpet from under Europe all over again. End result: EURUSD under 1.3100 and sliding.
From Citi:
All indications overnight are for a renewed flirtation with asset markets for risk-on. Equity futures are up, high-beta currencies are up, oil and commodities currencies are up. So why is the EUR down?
We conjecture that the reason may lie less in the euro zone debt crisis than in the euro zone joining the US in its WTO rare earth case against China. China has hinted that it would be more forthcoming on providing aid to the euro zone to deal with the sovereign crisis if the Europeans made political and trade concessions. The Europeans have made clear their interest in having the Chinese provide aid and support for their bailout plans. From a markets perspective, joining the rare earth’s case makes it less likely that China will be upping its participation in the bailout any time soon. Hence the backing up of spreads and the euro’s weakness on a day that otherwise should be an up day for the euro.