Home The lonely euro

In evidence once more yesterday was the resumption of a recent theme, namely a continual flight from the single currency. Against an otherwise relatively benign backdrop, the fact that the euro is consistently losing ground against other major currencies is incredibly revealing, suggesting a deep underlying disposition to a reduction of exposure by many different types of wealth managers, especially sovereign wealth funds.

Worryingly, there was no particular trigger in evidence yesterday, which reaffirms the underlying weakness of the currency. EUR/JPY fell to a new 11yr low, EUR/GBP dropped to a new four-year low and there were record lows for the euro against the Aussie, Kiwi and CAD. Against the dollar, for the umpteenth time in the past two weeks the 1.23 level has been tested and rejected.

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For now, there is absolutely no mileage in attempting to stand in front of the steady determination to sell the euro. It does not take a rocket scientist to predict that the euro will likely slide further over coming weeks as money managers with euro-exposure continue to seek a safer haven.

Commentary

Eurogroup to vote on direct lending to Spanish banks. After yesterday’s resounding vote in the German Bundestag in favour of allowing Europe’s rescue funds to directly recapitalise Spanish banks, eurozone finance ministers meet in Brussels today to approve the same. The exact amount to be provided will not be known for another couple of months, until detailed audits are finalised. Some 14 Spanish lenders are subject to these stress tests, accounting for roughly 90% of the Spanish banking system. Of particular interest will be whether the three largest banks in Spain, namely BBVA, Banco Santander and Caixabank, will need additional capital.

Aussie losing the high-beta mantle. Notwithstanding the downbeat prognosis for most of the world’s major economies, the Aussie continues to defy the doubters. Overnight the AUD reached an 11wk high of 1.0430; just a week ago it was looking decidedly shaky down near 1.01. Earlier this week the Aussie achieved a record low against the euro of just below 1.19. It remains around the 1.50 level against the pound, a decent performance considering that sterling has been one of the better currencies of 2012. In the last few days a couple of developments have provided the Aussie with some fresh buoyancy. After an extensive review lasting almost three years, the Bundesbank has relented and will add Australian dollar-denominated assets to its reserves. In addition, the Australian Financial Review has reported that the central bank of the Czech Republic has also vowed to invest in Aussie assets because of concerns over the euro. This has been a common theme this year – numerous sovereign wealth funds and FX reserve managers have been increasing their allocation to the Australian dollar. Indeed, such has been the Aussie’s resilience in 2012 that it is behaving less like a high-beta currency. For instance, the correlation between the Aussie and the MSCI Emerging Asia equities index has reduced significantly over the last couple of months. Much of the explanation for the recent breakdown of this high correlation between high-beta assets and the Aussie lies in the active diversification out of the euro by sovereign wealth funds, money managers and high net worth investors. This process of bailing out of the euro probably still has some way to go. As a result, this much-reduced correlation of the Aussie to high-beta assets may well continue for a while longer.

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