Euro falls through support | Norwegian inflation good for the currency

The Euro against the US dollar, EURUSD, has fallen through an important support level which came into existence in the wake of the interest rate cut announcement by the ECB last week. As expected, it took the market a little while to come to grips with the new situation.

There are many reasons why the Euro should now decline, not least the fact that the powers-that-be in the Euro zone wish this to happen. Those of us who pick up our clues about the future direction of currency pairs in order to facilitate trading have many sources, some more useful than others. The words of the ECB president, Mario Draghi, fall into the latter camp, and there was one remark that he made at last week’s press conference, almost as an aside, which, we believe, was significant. He said that a major reason for the strength of the Single Currency was the trade in peripheral bonds (Non Eurozone investors must first buy Euros in order to purchase the bonds). Presumably these are seen as good value because it has now been established, to the satisfaction of all, that these states will never be allowed to default. Given that, their bonds are as secure as those of Germany, but their yields have been much better.

Two things: (1) If Mario Draghi thinks this is worthy of remark, then it likely represents the truth of the matter; (2) He and his colleagues have it in their power to do something about it and, among other things, they may have been targeting exactly this trade when they decided to increase the liquidity of Eurozone banks. One way or another, this cash is likely to find its way into peripheral bonds, displacing cash from outside the EZ.

In any event, the demand for peripheral bonds has driven down their yields, so the market is pretty much cleared in any event.

Norwegian inflation is still elevated

Norway is concerned about inflation, which has been running above its target rate of 2%. Yesterday’s CPI report from our friends in Statistics Norway has revealed that there is, as yet, no respite in this issue. Inflation, net of energy and taxes, came in at 2.3% year on year up to May.

This means that there is no appetite on the part of the Norwegian Central bank for a reduction of interest rates, which currently stand at an historically low level, for Norway, of 1.5%. When this is compared with 0.15% in the Eurozone, in a downward trend, it can be seen that the interest rate differential between EUR and NOK is significantly in favour of the Norwegian currency.