EUR: Flying high - BBH

12 Jan 2018

There is one main story today and it is the euro's surge as the euro began the week consolidating its recent gains with a heavier bias, but the record of last month's ECB meeting surprised the market with its seeming willingness to change the forward guidance early this year in a more hawkish direction, explains the research team at BBH.  

Key Quotes

“This spurred a 0.7% gain in the euro back above $1.20.  The euro stayed bid in Asia, but took another leg up (~0.75%) in response to reports that a preliminary deal was struck between the CDU/CSU and the SPD in Germany to begin negotiations on another grand coalition.”

The euro has been bid through last September's high near $1.2090.  The euro is approaching the 50% mark of the drop from mid-2014 through the end of 2016, which is found near $1.2165.  The 61.8% retracement is found closer to $1.26.  The euro's surge has brought options into play that had seemed too far out to be relevant today.  There is are 2.5 bln euros struck at $1.21 that expire today, as well as 1.3 bln euros with a $1.2050 strike.”

There are important implications if the euro's rally is sustained.  It will dampen the very inflationary forces that are key to the evolution of the ECB's stance.  A stronger euro will also weaken earnings growth of the international companies.  Consider this:  a 6% appreciation of the euro on a trade-weighted basis is understood to be roughly equivalent to a 100 bp rate hike in terms of economic impact.  Since the end of September, the euro has risen about 2.5% on a trade-weighted basis.”   

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