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The short term way forward for the eur/usd

Views that the usd is set for real rebound against the eur seems based on the fact that the usd has fallen enough, technical factors, and very long term fundamental trends such as that the usd has to weaken to correct global trade imbalances. These are, in my view, irrelevant or too long term drivers to be particularly relevant in the context these debates. 

 

eur - lack of negative triggers and monetary tightening potentially way ahead of us

as we all know Germany and France's response to the sovereign debt crisis in Europe (and these are the two only countries that really counts), and the eur now reflects a de facto implicit guarantee across the eurozone - happened with the depreciation if the currency prior to the EFSF announcement, and reflected by the lack of reaction to more recent downgrades of several of the pigs. A further deterioration in countries such as Greece and Ireland should therefore not have a big impact. (i anyway believe recent focus on Ireland is taken out of proportions: the country is fully funded until 2011, had very recently good access to the market, and the "one-off" budget deficit is irrelevant as long as the debt position is as healthy as it is relative to gdp). Spain is clearly a slightly different matter given the relative size of the economy, but also here the debt/gdp appears too low to create anything comparable to a "Greece crisis".  So, Ireland, Portugal and Greece should be able to access the EFSF without any significant downside in the eur. 

the eurozone is again expanding, or more correctly, Germany and France are expanding. This is arguably to some extent driven by the weak eur in q2, but i still struggle to see a material impact on the German gdp only due to usd weakness in q3 (yes, the pmi readings are declining compared to q2, but still on the positive side by a large margin, and still relatively strong for Germany). the ecb, as being extremely hawkish and Germany focused, will clearly not let too many quarters pass by with continued economic growth and increasing inflation before reaction. This on the account of the weaker peripheral economies, of course.

 

usd - its all about housing

consumer spending and unemployment, two of the drivers of the weak us sentiment, both relates to housing, and here it is difficult to see a quick, cheap and uncontroversial fix. Current headlines focus on a second round of QE, (bad for the usd of course), but the benefit of this is questionable with 10y treasuries at around 2.5%. The fed is effectively running out of options, and the only way going forward, unless the housing market is addressed explicitly, is to let households de-leverage and wait for inflation to take households out of their negative equity. This can only be achieved by keeping interest rates where they are for a long period. Premature hikes would just hurt the already weak debt servicing capacity of households, and arguably send the economy into a second recession.

 

so, unless the coming week gives some clear indications that the current direction of the two economies, and than in particular the us economy, is radically changing, i see very few reasons why we should see a strong rebound in the usd going into q4. The us private sector adding 75k jobs in q3, to be announced in five days, is certainly not sufficient.

 

 



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