How The Euro Keeps Defying Doomsayers

In his latest Macro View, Richard Jones, an FX strategist who writes for Bloomberg, explains the resilience behind the common currency which has ignored every adverse piece of news thrown at it, and identifies the one main reason it keeps "deying the doomsayers."

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Euro Can Keep Defying Doomsayers, Thanks to Draghi

The euro rally is sustainable even amid the latest flare up of European political uncertainty.

A buoyant macro-economic environment partially explains the resilience, but most credit should go to the backstop offered by the ECB.

The laundry list of challenges -- coalition talks in Germany, Catalan secession, an Austrian election -- has failed to meaningfully impact either the single currency or the region’s sovereign yields. The Bloomberg Euro Index trades only about ~1% lower than the multi-year high seen in late August.

Mario Draghi’s "whatever it takes" rhetoric still inspires confidence in investors. Then add the not-insignificant fact that the ECB has bought more than 1 trillion euros ($1.19 trillion) of securities. Even with the specter of a potential taper, buyers of peripheral bonds know the central bank has their back.

If real pressure emerged, the ECB would doubtless be willing to deviate from the capital key to contain those risks. The bank has a proven track record of bending the rules when required.

A pick-up in both sentiment and hard data is contributing to the euro’s positive momentum, leading to a view among policy makers that the currency is rising for the right reasons,

Political and economic challenges remain. The case for structural reform remains as strong now as it has at any stage since the single currency was adopted. But investors seem optimistic that this can be achieved, especially if France and Germany begin to co-operate more than they have in the past.

Positive developments on that front would just provide the nitro boost to the durable and resilient euro appreciation trend.

Comments

Atlas Crapped Thu, 10/12/2017 - 06:22 Permalink

Conspicuously absent from this observation is that the Euro is completely divorced from the political sideshow. It represents a mature currency that can be substituted for the declining dollar today. It is also "backed" by the worlds largest "official" reserve of gold, the number one item on the asset side of the ECB balance sheet, marked to market (for what that is worth).Real money understands this. They are  not constrained to the Draghi reality show theatrics. "Whatever it takes" does not assist the currency at all.

Singelguy Atlas Crapped Thu, 10/12/2017 - 07:32 Permalink

The important distinctions are twofold.
1. The official gold reserves belong to to the individual member countries, not the ECB. The ECB cannot use that gold on their balance sheet.
2. There is no EU debt market. Each member country issues its own debt which through the ECB purchases, are kept at an artifically low rate.

The value of any currency is based upon the confidence of investors. If investors feel that the government is incompetent or totally corrupt, investment capital will flee that country and the corresponding currency will drop in value. This was last seen in Zimbabwe in the 90's and is now happening in Venezuela.

In reply to by Atlas Crapped

Ghordius Singelguy Thu, 10/12/2017 - 08:43 Permalink

1. not correct. you are mixing up the ECB's gold with the national gold reserves, which are separate. and bigger2. correct. but irrelevant. each national debt market is separate, yesfurther, the eurozone 19 are, in total, net positive in their payment account aka "current account". this means they have an excess in investment, either in the eurozone or outsidemeaning that the typical investor is an eurozoner, calculating in euros, not a foreigner calculating in a different currencyand, typically, he buys the local/national debt. Italians the Italian bonds, Spaniards the Spanish bonds, etc.

In reply to by Singelguy

WallHoo Atlas Crapped Thu, 10/12/2017 - 08:51 Permalink

I call bullhit on an EPIC scale.The real reason the euro can withstand pressure is because the gorvements that use the euro can withstand pressure.The eurozone economy is huge(yuuuge),the said states tax you in euros and have set the euro as a legal tender for all debts and taxes,hence as long as euro-using gorvements use the euro,the euro will exist...But by no means is the euro a reserve currency,reserve currencies needs to be abuddant (obviously) for world trade.The only way to do that is through defict spending from the state and a sustained deficit in trade.The problem is theres no (centralised) state to run the budget deficit and obviously theres no trade deficit,in contrast to that the "economic powerhouse" of europe (germany) runs a huge trade surplus to satisfy domestic private and public debts,investments,wages and the economy in general. All money is debt and the only one that can make debts for a long long time is the state,There is no state in europe,which means that the only way for eurozone countries to exist is from trade surpluses. My personal opinion is that the squid has concentrated its efforts in Europe,the european block tries desperratly to concentrate wealth on huge levels from all around the world,either by trade or by outright owning properties or companies(stocks) around the world or throught debt obligations(bonds).Think of it as China on steroids.The difference is that the chinese are pumping money into their own market,in europe theres noone to throw any money anyhwere.So all deficts around the world like for example from the US go to the squid centered in germany,i would advice caution to Americans... All international trade is barter,gold could be used as an internation mean of payments between nations but nothing more...Gold has nothing to do with the euro defying any adversities.In fact european debt problems are made up in order to introduce a federal state,in the absence of gorvement money and in an inviroment where credit is deflating,a euro state or a "eurozone economic ministry" seems better and better by the day. Fuck the EU and the german cucks.  

In reply to by Atlas Crapped

Ghordius WallHoo Thu, 10/12/2017 - 09:00 Permalink

"But by no means is the euro a reserve currency,reserve currencies needs to be abuddant (obviously) for world trade."wrongthe definition of "reserve currency" is "what other, foreign national/central banks hold as assets"example: the People's Bank of China holds trillions of US Treasuries on their balance sheet. those USTs are part of the FX Reserves of the PBofC. that makes the USD a reserve currency... for Chinawhy a currency is held as reserve can have political reasons. sure, trade plays a role, but not the only one

In reply to by WallHoo

WallHoo Ghordius Thu, 10/12/2017 - 17:33 Permalink

Wrong?Obviously holding dollars outside of the USA means theres and abundance of them,or you cant hold them...And obviously that justifies the deficits that the USA has with the rest of the world in contrast to the eurozone that has a surpluss bigger than China. The rest that you say are true for sure...But OBVIOUSLY everybody knows that ""reserve currency" is "what other, foreign national/central banks hold as assets"" Duh... I was talking about the dysfactional euro...Dont throw the ball around sick cuck.

In reply to by Ghordius

Doom and Dust Thu, 10/12/2017 - 06:18 Permalink

Eurozone exports ex-EU are booming despite a strong euro, and the euro is strong despite the ECB's QE.Italy, Germany, Spain, the Benelux and the Nordic countries all have stronger economic growth in real per capita terms than the US, or the UK.The Eurozone is now the cleanest shirt in a very dirty basket.

Yog Soggoth libertyanyday Thu, 10/12/2017 - 16:48 Permalink

Thats like some Liberal from Vermont not seeing any hispanic invasion, while the people in problem areas have to dress their kids in certain colors to avoid being shot or stabbed. Funny I never had to learn gang signs 25 years ago, now the elementary school kids have to know them to know when to run. How does it remain 11 million for over a decade even though they are still pouring in and having 4 kids a couple? When the EU falls apart, Germany is still sitting on the biggest piece of yellow to back the new Mark. Even if the real plan was to see if they could start the new world order from the EU, failure leaves all the stolen assets to Germanys elite investors while the smaller countries have to recover losses from getting ripped off by the scam.

In reply to by libertyanyday

WallHoo Doom and Dust Thu, 10/12/2017 - 09:03 Permalink

All those countries also have a falling living standard you fucking cuck.Everyone is living on ECB QE that was implemented to protect the rich and recycle debts until a more permanent sollution is found(european state,european economic ministry). For no reason at all money(credit in the case of the eurozone) comes from debt,perpetual serfdom for everybody.And you little sick fuck like that.The elites in europe have managed to concentrate political(brussels) and economic power (ECB) while everybody else at the bottom suffers. Tell me you little cuck why the fuck should anybody export if they dont intend to import?Why is exporting good if you dont want to import anything?And how will everybody in the world are going to live if EVERYBODY WANTS TO EXPORT??How is that even possible?Are we gonna export to aliens? But of course you need exports in order to pay your masters... Fuck the EU.     

In reply to by Doom and Dust

WallHoo Doom and Dust Thu, 10/12/2017 - 17:35 Permalink

Allright sicko its on,you wanna get youre ass kicked here we go... 1.You say nothing about the QE Euro-zombie land...Nothing about the QE being a recycling mechanism for youre masters and nothing about the dysfactional euro that has no autority(state) to manage the currency. 2.You say nothing about the debt based system that we live in and you hide behind 3rd worlders to justify the dictatorial regime that the EU/Eurozone has become. 3.And of course you say nothing about the neoliberal madness of "we need exports but who cares about this sick system" The only thing you do is a little fart saying,"The Eurozone has only a 24bn/year trade surplus you ignorant numbnut." Ok then how about that,maybe you are correct on that... Here are the charts on the current account balance for a bunch of countries and "regions":https://data.worldbank.org/indicator/BN.CAB.XOKA.CD?end=2016&locations=… China the fucking Giant in 2015 had a CAB (current account balance) of 304.164 billion dollars and in the year 2016 196.380 billion dollars. Eurozone,the sick cuck land had a CAB of 329.196 in 2015 AND USA for the year 2015 had a CAB of -462.961 If it wasnt for the USA the whole world would be starving for money to satisfy this sick system.Of course americans are too stupid too understand on what kind of goldmine they sit upon and how they are getting riped off.As i said before in above commets,the squid is in full swing in Europe and it is gathering wealth from all around.The center of cource is cuck-land germany.In my above comments i also mentioned not only exports,but assets and debt.  How is it possile that sick fucks like you are so arrogant is beyond my imagination...  

In reply to by Doom and Dust

illuminatus Thu, 10/12/2017 - 06:23 Permalink

All you captains of high finance, I hope you know that the gravy train is a two edged sword and while the central bank giveth, you can be sure that it taketh alot more. 

FredGSanford. Thu, 10/12/2017 - 06:24 Permalink

The stock market and the economy also continues to defy doomsayers.

It’s rather humorous. The folks who continue to predict a crash continue to be wrong. They look more foolish everyday.

It really defies all common sense.

rmopf2010 shutterbug Thu, 10/12/2017 - 07:12 Permalink

Comunism V1.0 The will of People was forced by weapons by a minority (TPTB didn't realize state dependents were enough to win all elections)Comunism V2.0ratio "state dependents/private workers" is greater than 1TPTB know have full conscience they can win all elections just because all "public workers/retirees/ebt cards/etc" arein greater number tha private workers, so it's easy to win elections     

In reply to by shutterbug

floosy Thu, 10/12/2017 - 06:31 Permalink

At least they no longer pretend that a Central Bank Fiat currency system is anything other than a means to turn the blood sweat and toil of ordinary folk into hard assets for the elite.

Ghordius floosy Thu, 10/12/2017 - 07:07 Permalink

it's the "game in town" and the "town" is the whole planet

ordinary folks are hurt by two things, usually: stagnant wages up to no jobs, and prices for living needs going up

in this context, a stable currency is good for workers. the rich can cope with other scenarios, mind. they always did

In reply to by floosy

nevenbridge Ghordius Thu, 10/12/2017 - 08:45 Permalink

euro is shit for workers, euro is built upon the deflation of salaries. It's pure incandescent liquid shit for the 90% of ppl. 10 years i want to leave this fucking euro zone but political parties keep changing their election program ffs. I would actively support a new fascit coup d'etat.My country decline started with the CEE that lately became the more shitty €uropean union. €uro is a fucking cancer.

In reply to by Ghordius

shutterbug Thu, 10/12/2017 - 06:48 Permalink

Crazy is ... DEFINED ... by (central) banker people like Draghi... he would kill the world, just to do what he thinks is "right"...Now that seems to be repeating in this era ...

Bearwagon Thu, 10/12/2017 - 06:50 Permalink

Same old, same old "it's a project in the European Union. That's why you have a very hard time asking people like me 'what would happened if'." No Plan B  ;)