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.
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