Yesterday the selling of the Euro continued
in earnest, on the day following the implementation of Eurozone Quantitative
Easing. The ECB does not do things by half, and it is now in the process of hoovering
up government bonds from across the Single Currency zone, with the noticeable exception
of those that have Greek issuance (and visceral fears of Greek contagion on the
back of noises from that country about a possible referendum on Euro membership
are not helping the currency either). Consequently, bond yields have plummeted,
with some going into negative territory.
This overall trend is not likely to
change soon. Eurozone QE will be around for some time. Now that they have
started the process, Mr. Draghi and his colleagues at the ECB can be expected to
give it plenty of time to work its magic, the ultimate aim of which is to increase
inflation. One tried and tested way to do that is to reduce the value of the
region’s currency.
The Euro seems to be heading to a
one-to-one valuation with the US dollar, and there is no reason to believe that
it will stop there. If it does go below parity, it will be the first time this
has happened since shortly after its introduction for normal use in January
2002.
While the reduction in the value of
the Single Currency is likely to draw in buyers of European equities from
outside the zone, which will require Euro purchases, these are also likely to
be hedged, which will mitigate against any tendency for a rise in equities to
bolster the Euro, at least in the medium-term. In the meantime, corporate
bodies and institutions from across the globe are rushing to borrow in Euros,
which now has the potential to become the global funding currency of choice,
given the high likelihood of core interest rate rises in the US in the near
future.
Kiwi
is also suffering
In New Zealand, the Kiwi (NZ dollar)
has been hit by something of a double whammy. It is one if the very few
prominent currencies against which the Euro is rising at the moment (as can be
seen from the chart above, higher highs and higher lows are in evidence in the EURNZD pair since
Thursday of last week).
This has come about (1) because of a
threat, apparently by animal rights activists, to contaminate milk products with
the same poison the NZ government uses to control the spread of certain wild
animals. New Zealand’s most important exports come from the dairy sector. (2) The
second element in the fall of the currency is a renewed determination on the
part of the Reserve Bank of New Zealand (RBNZ) to reign-in the inexorable rise
in house prices, the success of which measures will open the door for a cut in
interest rates there, which are amongst the highest in the developed world. The
Forex market is reacting accordingly.
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