##{"id":58909,"date":"2011-09-28T11:18:40","date_gmt":"2011-09-28T01:18:40","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/09\/28\/what-is-driving-the-euro\/"},"modified":"2011-09-28T11:18:40","modified_gmt":"2011-09-28T01:18:40","slug":"what-is-driving-the-euro","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/09\/28\/what-is-driving-the-euro\/","title":{"rendered":"What Is Driving The Euro?"},"content":{"rendered":"<p>\n\tBy Kathleen Brooks, Research Director UK <span>EMEA<\/span>, <span>FOREX.com<\/span><\/p>\n<p>\n\tOver the past few days there has been much speculation about what has been (and what will be) the future drivers of the euro.<\/p>\n<p>\n\tFor most of the past year the chief driver has been a positive yield differential and a collapse in the dollar. However, it seems increasingly unlikely that we can rely on these two drivers going forward.<\/p>\n<p>\n\tCorrelation analysis gives you a quick snap shot of how things have changed for the euro. Since the start of this month its two most important drivers have been 1, the S&amp;P &#8211; with a 79% correlation &#8211; and 2, the two year German bond yield at 70%. In contrast, Euro swap rates (a good indication of short term interest rates) have lost significance as a driver.<\/p>\n<p>\n\tBoth German bond yields and stocks are closely aligned with risk appetite: stocks have collapsed as risk has sold off, bond yields have fallen as German government debt has attracted safe haven flows, which has dragged the euro lower.<\/p>\n<p>\n\tSo what does this tell us?<\/p>\n<ul>\n<li>\n\t\tThe single currency is moving with risky assets. It has a negative correlation with the <span>Vix<\/span> &ndash; Wall Street&rsquo;s ultimate fear <span>gauge<\/span> &#8211; which is now at 82%, compared with an insignificant 53% back in February.<\/li>\n<li>\n\t\tCurrently the outlook for interest rates in the euro area is only important for the euro if it impacts risk &#8211; <span>i.e<\/span>, if a <span>dovish<\/span> <span>ECB<\/span> boosts risk appetite then we could see the euro rise even as yield expectations fall.<\/li>\n<li>\n\t\tThe positive tone towards risk assets in recent days is completely reliant on 1, the EU authorities agreeing on a radical plan to extend the <span>EFSF<\/span> fund to the tune of <span>EUR2<\/span>\/<span>3trillion<\/span>, 2, a <span>recapitalization<\/span> of the banks and 3, an orderly default for Greece. This is a tall order and the EU authorities have a history of underperforming and dashing market expectations causing bouts of market turmoil.<\/li>\n<li>\n\t\tThus, while the euro moves in a pack with risk, expect volatility ahead.<\/li>\n<\/ul>\n<p>\n\tBut this sell off in the euro has some crucial differences with the decline in early 2010. Although the <span>Eurozone<\/span> debt crisis has notched up a few gears the most recent fall in the euro from 1.4500 to 1.3500, is small in comparison to the decline to 1.1800 last year during the first Greek default.<\/p>\n<p>\n\tThis tells us a couple of things:<\/p>\n<p>\n\t1, There could be further to go if the EU disappoints on its latest rescue plan.<\/p>\n<p>\n\t2, The long-term flows like central banks\/ institutional investors etc that have also helped to support the euro in recent months have not ditched the single currency yet.<\/p>\n<p>\n\tIn conclusion, the euro is vulnerable to risk sentiment and is likely to trade in a range with a negative tone for some time yet (or until the sovereign debt crisis is solved in a sustainable way).<\/p>\n<p>\n\tInterest rates will only impact the euro in as much as they affect risk appetite. Looser monetary policy from the <span>ECB<\/span> is likely to be more positive for risk, so expect an inverse yield effect for the euro in the short-term: thus, a reduction in rate expectations (as measured by euro swap rates) may cause a boost to the euro. However, rising German bond yields are also euro positive since German bonds are acting like a safe haven asset. Any sign that long &ndash;term investors are getting nervous of holding euro would be extremely negative for the single currency.<\/p>\n<p>\n\t<strong>The euro is moving with risk. <span>EURUSD<\/span> (white line) and <span>Vix<\/span> index (orange line). NB: The <span>Vix<\/span> moves higher when there is a slump in risk appetite.<\/strong><\/p>\n<p>\t<strong><img decoding=\"async\" alt=\"\" src=\"http:\/\/www.fnarena.com\/ckfinder\/userfiles\/images\/forexcom28-9.jpg\" style=\"width: 700px;height: 295px\" \/><\/p>\n<p>\tTechnical limitations<\/strong><\/p>\n<p>\n\t<strong><span style=\"font-style: italic\">If you are reading this story through a third party distribution channel and you cannot see charts included<\/span>, <em>we <span><span>apologise<\/span><\/span>, but technical limitations are to blame.<\/em><\/strong><\/p>\n<p>\n\t<em>Find out why <span>FNArena<\/span> subscribers like the service so much: &quot;<a href=\"http:\/\/www.fnarena.com\/index4.cfm?type=dsp_newsitem&amp;n=29EB960D-9DFF-C00E-7F6B464E5D52E250\">Your Feedback (Thank You)<\/a>&quot; &#8211; Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Analysis by FOREX.com suggests the euro may have further to fall if the EU disappoints on its latest rescue plan, as the currency is still vulnerable to risk sentiment.<\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[10],"tags":[29,41],"acf":[],"_links":{"self":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/58909"}],"collection":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/comments?post=58909"}],"version-history":[{"count":0,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/posts\/58909\/revisions"}],"wp:attachment":[{"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/media?parent=58909"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/categories?post=58909"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/staging.fnarena.com\/index.php\/wp-json\/wp\/v2\/tags?post=58909"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}