No new era for the euro
EUR USD (1.2790) The upside data surprises in the US payrolls data should, intuitively, have led to a ‘risk on’ sentiment and a dollar fall, according to traders. The euro decline therefore led many to dwell on the onset of a new era for the currency – one where risk-on/risk-off is redundant or even where the euro is the new carry-currency. We disagree. The decoupling of the EUR/USD and the direction of data surprises is a product of the anticipated central bank policy response. The current situation is one where the ECB is more likely to increase its balance sheet than the Fed. The ECB’s three-year LTRO and its sporadic bond purchases are a variation on the QE theme, whereas Fed QE3 remains a distant prospect. As for the notion of a revival of the carry-trade, we see this as improbable because the first precondition – the ability of hedge-funds, traders or households to borrow the carry currency cheaply – is not met. Banks with access to cash apparently prefer to park it at the ECB (overnight record of €463 billion) or with the German government (record negative yields) than lend it out at favourable rates. In an environment where safety scores over returns, carry-trades can hardly become popular.
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