EUR/USD: Capital In-Flows Vs. Spain Problems

Includes: EWP, FXE, UDN, UUP
by: Michael Sankowski

Something strange is happening in the EURUSD. The investment community is freaking out about the debt problems in Europe, but the EURUSD is not falling in price.

A few months back, I made the bold claim the solutions would drive the EUR lower - and how the link between euro problems and the price level of the euro seems to have broken entirely.

"Since then the EURUSD has been a sentiment gauge - when it's over 1.4000, all was fine. Between 1.3000 and 1.4000, well there might be problems. Below 1.3000 you got absolute panic.

But in the last few weeks, this link has been severed almost entirely. The level of the EURUSD no longer indicates the level of danger for the euro."

In the last month, the headlines out of Europe have been entirely grim. Spain is making the news nearly every day. German Central Bank head is making crazy talk about more austerity, despite the obvious link between austerity and recession.

You would think more worries about problems in Spain would cause the threat of using the solutions (which weaken the euro) to go critical. Still, despite the increased levels of worry about the euro, there hasn't been a significant move in the EURUSD. What is going on?

There has been a decent amount of investment capital re-patriated into Europe - meaning money which was parked outside of Europe during the worst days of the crisis has been coming back into the Euro countries.

Most of the money coming into the eurozone appears to be foreign money, which had been worried about the Euro disintegrating overnight. Of course we all know this re-patriation of funds does not solve the problems facing Spain, Italy, Greece, Portugal, or Ireland.

The repatriation of funds into the eurozone can't last forever. At some point, the flow of funds will slow and then stop.

As of now, the weakness caused by the solutions in the euro is being offset by capital flows into the eurozone as investors feel more comfortable with the long term viability of the euro.

Until this flow of capital back into Europe slows, expect back and forth movement in the EURUSD.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.