Market Commentary
│
March 27, 2014
Weekly Roundup
Tom Fitzpatrick 1-212-723-1344 thomas.fitzpatrick@citi.com Shyam Devani 44-207-986-3453 shyam.devani@citi.com Dan Tobon 1-212-723-1576 daniel.tobon@citi.com
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Chart of the Week
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Why does the EURO refuse to go lower?
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Contrary to most consensus views (Including ours) EURUSD has failed to move lower in 2014. Why?
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We think there are some valid arguments in this respect, which fit very well with the historic dynamic seen in 1997-1998.
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If so then it still remains only a matter of time before market dynamics will reach a point where EURUSD once again makes a strong move to the downside.
Market Commentary │
March 27, 2014
Market Commentary
–
for Institutional Client Use Only. Refer to informational disclosures and qualifications at the end of this publication.
Weekly Roundup March 27, 2014
2
Chart of the Week
–
Why does the EURO refuse to go lower?
–
Contrary to most consensus views (Including ours) EURUSD has failed to move lower in 2014. Why?
–
We think there are some valid arguments in this respect, which fit very well with the historic dynamic seen in 1997-1998.
–
If so then it still remains only a matter of time before market dynamics will reach a point where EURUSD once again makes a strong move to the downside. EURUSD long term chart:
Source: Aspen graphics/Bloomberg March 26, 2014.
The long term EURUSD chart shows the similarities with that seen in the last USD cycle throughout the 1990’s
Both rallies were similar in length as were the background economic dynamics (housing boom and subsequent
bust in the US in the early 1990’s and again in 2006
-2007)
The highs came in 1992 and 2008 and the major developments that followed three years after each of those highs was a currency crisis in Europe
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ERM crisis in 1995
and the European
Sovereign debt markets crisis in 2011
.
Within the bear market for EURUSD that came after 1995 we can see there was a decent correction up from August 1997 into October 1998 which saw
EURUSD bounce 16.5%
Since the low posted at 1.2043 in July 2012,
EURUSD has bounced 16%
so far.
As a consequence we believe an important peak has either been put in place or is coming relatively soon which would mark a turning point that is likely to send EURUSD back to the
200 month moving average at 1.2134
A monthly close below that 200 month moving average (which has limited the three major falls in EURUSD over the past 10 years) would then open the way for much lower levels still over time (Possibly to parity or below over the next 2-3 years)
16.5% rally within the downtrend into October 1998 At this point peripheral bond market yields (Italy/Spain) had almost converged to Germany across the yield curve as had FX rates. 16.0% rally so far off July 2012 low 1992-1995: ERM Crisis 2009-2012: European Bond market crisis 91 months uptrend 93 months uptrend
?
Market Commentary │
March 27, 2014
Market Commentary
–
for Institutional Client Use Only. Refer to informational disclosures and qualifications at the end of this publication.
Weekly Roundup March 27, 2014
3
EURUSD 1995-1998 and 2011-2014 - Not identical but pretty similar
Source: Aspen graphics/Bloomberg March 27, 2014.
When we look at that rally in the EUR (As its components ITL,ESP,FRF etc.) into late 1998 we saw two strong convergence trades taking place
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FX rates:
Following the devaluations into the peaks in early 1995 peripheral currencies eventually
converged in late 1998 to their “entry fixings” in the new single currency.
Deutsche Mark Italian Lira- During ERM crisis and into creation of the EURO
Source: Aspen graphics/Bloomberg March 27, 2014.
Massive devaluation from 1992-1995 of Italian Lire followed by convergence trade into the Euro fixing rate in late 1998. That level still left the ITL about 30% weaker than 1992 and combined with the bond market move was very stimulative. In t
oday’s
crisis there has been no scope for an internal FX devaluation in Europe hence the fiscal austerity program, which is much more damaging domestically.
Peaks in October 1998 with a 16.5% rally as convergence trade gets close to endgame. Falls 20 big figures in following 8 months Peaks in April 2014 with a 16.0% rally as convergence trade gets close to endgame?
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