{"id":967,"date":"2012-04-05T14:10:00","date_gmt":"2012-04-05T14:10:00","guid":{"rendered":"http:\/\/starthostunlimiteddmffassi-ss.stackstaging.com\/bondworld.ch\/home\/sites\/20b\/7\/760c69a11c\/public_html\/investmentworld.ch\/index.php\/2012\/04\/05\/forex-markets-euro-no-plunge-despite-the-very-survival-of-emu-being-threatened\/"},"modified":"2012-04-05T14:10:00","modified_gmt":"2012-04-05T14:10:00","slug":"forex-markets-euro-no-plunge-despite-the-very-survival-of-emu-being-threatened","status":"publish","type":"post","link":"https:\/\/www.investmentworld.eu\/ch\/forex-markets-euro-no-plunge-despite-the-very-survival-of-emu-being-threatened\/","title":{"rendered":"Forex markets: Euro: no plunge despite the very survival of EMU being threatened"},"content":{"rendered":"<p style=\"text-align: justify;\">The sovereign debt crisis in the euro area worsened in 2011, with serious negative repercussions in real terms as well.<span lang=\"EN-GB\">.<\/span>&#8230;<span lang=\"EN-GB\">&#8230;<\/span><strong><span lang=\"EN-GB\">&nbsp;<\/span><\/strong><span lang=\"EN-GB\"> <\/span><span lang=\"en-GB\">&nbsp;<\/span><\/p>\n<p>  <!--more-->  <\/p>\n<ul> <\/ul>\n<ol><\/ol>\n<ol><\/ol>\n<ol><\/ol>\n<ol><\/ol>\n<hr \/>\n<p> <\/p>\n<p style=\"text-align: justify;\"><span style=\"font-family: arial,helvetica,sans-serif;\"><span style=\"font-size: 10pt;\"><strong>For professional investors and advisers only<\/strong><\/span><\/span><\/p>\n<hr \/>\n<p>Nonetheless,  the lows hit by the euro in 2011-12 were much higher than those reached  in 2010 (EUR\/USD 1.26 vs. 1.18). Similar considerations apply to the  yen and the pound. The common factor which explains the unusual  behaviour of euro, yen, and sterling, is the (prolonged) zero-rate  policy pursued by the respective central banks. <\/p>\n<div style=\"text-align: justify;\">This  has been a turbulent start to the year for the euro, which initially  dropped from EUR\/USD 1.30 to 1.26, and then climbed back to EUR\/USD  1.35. The recovery was helped by the longawaited \u201csolution\u201d of the Greek  crisis. This prompts the first question: (1) if the Greek crisis is<br \/>solved,  what will the euro\u2019s drivers be now? The second question is linked with  the first: (2) why has the euro shown such downside resilience2,  despite the deepening of the sovereign debt crisis, and despite the very  survival of EMU being threatened?<\/div>\n<div style=\"text-align: justify;\">As  regards point (1), until well into Q1 2012, the dominant overall theme  was the sovereign debt crisis, with particular reference to Greece. The  repeated postponements of the deadlines set for the solution of the  Greek deadlock helped water down risk aversion, which may have otherwise  crushed the single currency. Now that the Greek crisis has, so to say,  been \u201csolved\u201d, the necessary condition has been met to move on to the  next market phase, in which traditional fundamentals should resume their  role as drivers, i.e. growth and inflation, and consequently monetary  policy expectations\/decisions. Based on our central growth scenario for  the euro area and the United States, the better expected performance of  the latter should penalise the euro in the opening months of the year,  and therefore by now also in Q2. From a purely technical point of view,  conditions are still in place for a decline of the exchange rate to  below 1.30 (downside technical target at EUR\/USD 1.26-1.25). The  subsequent expected economic recovery in the euro area should then fuel a  recovery in Q2, with the exchange rate possibly rising towards the  EUR\/USD 1.35-1.40 range towards the end of the year\/early 2013. The  possibility of the Fed implementing a round of QE3 around mid-year  should not be viewed as a negative event for the dollar, after a  potentially negative impact reaction. The favourable effect the move  would have on US growth should ultimately support the dollar and,  symmetrically, weaken the euro, either by causing it to temporarily  drop, or by compressing its recovery margin. By contrast, if the ECB  should need to resort to another interest rate cut, this would probably  affect the single currency negatively. It should also be considered that  \u2013 although the Greek deadlock has been overcome \u2013 the sovereign debt  crisis in its broadest sense has not been solve, and may re-emerge in  certain instances, negatively conditioning the fluctuations of the  exchange rate.<\/div>\n<div style=\"text-align: justify;\">As  regards point (2), there are at least three sets of reasons that may  help explain, at least in part, such a display of downside resilience by  the euro.<\/div>\n<div style=\"text-align: justify;\">(i)  From a technical point of view, aggregate short euro positions, which  have been mounting on the speculative market since August 2011, have  reached new historical highs compared to the first Greek crisis in 2010,  hitting a peak this year of over one-and-a-half times the high hit in  May 2010. Stably large short euro trades played an important role in  containing, from a technical point of the view, downside on the single  currency, lacking sufficiently serious elements to trigger a total  liquidation of sorts of assets in euros.<\/div>\n<div style=\"text-align: justify;\">(ii)  From the point of view of macroeconomic fundamentals, broad convergence  towards zero interest rates3 in the euro area (Fig. 1), while US rates  were already close to zero (Fig. 2), provided further grounds,  substantial rather than technical, for downside resilience, as nominal  rates cannot drop below zero, and the sensitivity of the EUR\/USD to  short-term euro yields is positive, and its sensitivity to short-term US  yields is negative.<\/div>\n<div style=\"text-align: justify;\">(iii)  Finally, operational hedge against the risk of EMU breakup implies a  liquidity shift towards countries with more robust fundamentals rather  than any capital outflow from the euro area.<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<p style=\"text-align: center;\"><img loading=\"lazy\" decoding=\"async\" alt=\"05042012_1\" src=\"images\/stories\/intesa weekly\/05042012_1.png\" width=\"431\" height=\"152\" \/><\/p>\n<div style=\"text-align: justify;\">We  focus here on the relationship between the exchange rate and bond  yields (par. ii). To the extent to which rates\/yields can provide an  idea of growth and inflation expectations, and of the associated  monetary policy choices, the correlation between the EUR\/USD exchange  rate and short-term yields in the euro area and in the US respectively,  may be verified and measured.<br \/>Using weekly data (averages) from the  2005-2012 period, we have verified the existence of a co-integration  correlation (i.e. structural, long-term) between the exchange rate and  the aforementioned yields. Based on the estimates yielded by the  co-integration parameters, we have obtained a fit that seems to explain  rather well the dynamics of the euro in recent years (Fig. 3).<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<p style=\"text-align: center;\"><img loading=\"lazy\" decoding=\"async\" alt=\"05042012_2\" src=\"images\/stories\/intesa weekly\/05042012_2.png\" width=\"430\" height=\"182\" \/><\/p>\n<div style=\"text-align: justify;\">Given  the structural nature and the validity of the estimates obtained, they  can be used to run a simulation. Therefore, we will assume different  combinations of euro and US yields on a oneyear horizon, and project the  model to investigate which exchange rate levels are consistent with  certain yield combinations.<\/div>\n<div style=\"text-align: justify;\">As  shown in the chart (Fig. 4) and in the table below (Table 1), the more  euro area yields rise against US yields, the more the euro will tend to  appreciate (cases a, b, c). By contrast, the more US yields rise  compared to euro area yields, the more the euro will tend to drop (cases  d, e, f).<\/div>\n<div style=\"text-align: justify;\"><\/div>\n<p style=\"text-align: center;\"><img loading=\"lazy\" decoding=\"async\" alt=\"05042012_3\" src=\"images\/stories\/intesa weekly\/05042012_3.png\" width=\"432\" height=\"218\" \/><\/p>\n<div style=\"text-align: justify;\">In  case (c), i.e. stable euro area yields at their current levels in the  next 12 months, and US yields dropping further towards zero, the euro  would level off at EUR\/USD 1.35, just above its present level (1.32 in  the analysis run here). This combination would be compatible with the  assumption of stable ECB rates at least until the middle of next year,  and with the Fed implementing QE3 in the next few months. Case (b) is  closer to our central scenario for the euro area and the United States,  which assumes a normalisation on the upside of euro area yields, and a  modest, smaller increase, of US yields. Based on this assumption, the  exchange rate would rise to EUR\/USD 1.39.<\/div>\n<div style=\"text-align: justify;\">Therefore,  conditions would be in place for the euro to fall within the EUR\/USD  1.35-1.40 range, in line with the prospect of a recovery of the exchange  rate towards the end of 2012\/early 2013, as described in the closing  paragraph of point (1).<\/div>\n<div style=\"text-align: justify;\">On  the other hand, the yield combinations proposed in cases (d), (e), (f),  stray from our central macroeconomic scenario, and would all imply a  drop of the exchange rate from its present levels. The decline would not  be significant, to EUR\/USD 1.30, in case (d), in which euro area yields  converge towards zero, as opposed to a stabilisation of US rates at  their present levels. On the other hand, the drop would be sharper, to  EUR\/USD 1.25, in case (e), in which a normalisation on the upside of  euro area yields were accompanied by a much sharper rise in US yields  (not compatible with the implementation of QE3 in the months ahead, but  not necessarily triggering the start of a Fed rate hike cycle). Lastly,  the combination of assumptions envisaged in case (f) would be scarcely  credible, with euro area yields rising only very marginally, and US  rates soaring (to levels compatible with the start of a Fed Funds rate  hike cycle). In this case the euro would plummet to EUR\/USD 1.15.<\/div>\n<div style=\"text-align: justify;\">The  results of this simulation exercise should not be taken literally, as  the estimates used here are derived from a co-integration correlation,  i.e. from a long-term correlation, which is purely structural, and does  not take into account of short-term adjustments.<\/div>\n<div style=\"text-align: justify;\">In  a phase of relative policy rate stability, these estimates provide a  good approximation of the fair value of the exchange rate under certain  interest rate assumptions.<\/div>\n<div style=\"text-align: justify;\">And  if cases (b) and (c) may help place the euro in the 1.35-1.40 range on a  one-year horizon based on the hypothesis of our central macroeconomic  scenario, case (f) may help explain why (and under which conditions) the  euro shows downside resilience.<\/div>\n<div style=\"text-align: justify;\">Indeed,  in a context of unchanged monetary policies in terms of policy rates,  already respectively at historically low levels (ECB rates) and almost  zero (Fed rates), the simulations would show that in order to trigger a  substantial depreciation of the euro (to EUR\/USD 1.15 in case f) US  yields should rise significantly compared to euro area yields, an  assumption that cannot materialise as long as the Fed is committed to  keeping rates stable at least until around mid-2014.<\/div>\n<p style=\"text-align: justify;\"><span style=\"font-family: arial,helvetica,sans-serif;\"><strong> <\/strong><\/span><\/p>\n<hr \/>\n<p> <span style=\"font-family: arial,helvetica,sans-serif;\"><strong> <\/strong><\/span> <\/p>\n<p style=\"text-align: justify;\"><strong><span style=\"font-family: arial,helvetica,sans-serif;\">Appendix<br \/>An<\/span>alyst Certification<\/strong><br \/>The  financial analysts who prepared this report, and whose names and roles  appear on the first page, certify that: (1) The views expressed on  companies mentioned herein accurately reflect independent, fair and  balanced personal views; (2) No direct or indirect compensation has been  or will be received in exchange for any views expressed. Specific  disclosures: The analysts who prepared this report do not receive  bonuses, salaries, or any other form of compensation that is based upon  specific investment banking transactions.<\/p>\n<p><strong>Important Disclosures<\/strong><br \/>This  research has been prepared by Intesa Sanpaolo S.p.A. and distributed by  Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the  London Stock Exchange) and Banca IMI Securities Corp (a member of the  NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for  the contents of this report. Please also note that Intesa Sanpaolo  S.p.A. reserves the right to issue this document to its own clients.  Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo  Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both  authorised by the Banca d&#8217;Italia, are both regulated by the Financial  Services Authority in the conduct of designated investment business in  the UK and by the SEC for the conduct of US business.<br \/>Opinions and  estimates in this research are as at the date of this material and are  subject to change without notice to the recipient. Information and  opinions have been obtained from sources believed to be reliable, but no  representation or warranty is made as to their accuracy or correctness.  Past performance is not a guarantee of future results. The investments  and strategies discussed in this research may not be suitable for all  investors. If you are in any doubt you should consult your investment  advisor. <br \/>This report has been prepared solely for information  purposes and is not intended as an offer or solicitation with respect to  the purchase or sale of any financial products. It should not be  regarded as a substitute for the exercise of the recipient\u2019s own  judgement.<br \/>No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities  accept any liability whatsoever for any direct, consequential or  indirect loss arising from any use of material contained in this report.  <br \/>This document may only be reproduced or published together with the  name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo  S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management  Policy for managing effectively the conflicts of interest which might  affect the impartiality of all investment research which is held out, or  where it is reasonable for the user to rely on the research, as being  an impartial assessment of the value or prospects of its subject matter.  A copy of this Policy is available to the recipient of this research  upon making a written request to the Compliance Officer, Intesa Sanpaolo  S.p.A., 90 Queen Street, London EC4N 1SA.<br \/>Intesa Sanpaolo S.p.A. has  formalised a set of principles and procedures for dealing with  conflicts of interest (\u201cResearch Policy\u201d). The Research Policy is  clearly explained in the relevant section of Banca IMI\u2019s web site  (www.bancaimi.com).<br \/>Member companies of the Intesa Sanpaolo Group, or  their directors and\/or representatives and\/or employees and\/or members  of their households, may have a long or short position in any securities  mentioned at any time, and may make a purchase and\/or sale, or offer to  make a purchase and\/or sale, of any of the securities from time to time  in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and  circulates research to Qualified Institutional Investors in the USA only  through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167  New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This  document is intended for distribution only to professional investors as  defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a  printed document and\/or in electronic form. Person and residents in the  UK: This document is not for distribution in the United Kingdom to  persons who would be defined as private customers under rules of the  FSA.<br \/>US persons: This document is intended for distribution in the  United States only to Qualified Institutional Investors as defined in  Rule 144a of the Securities Act of 1933. US Customers wishing to effect a  transaction should do so only by contacting a representative at Banca  IMI Securities Corp. in the US (see contact details above). <br \/><strong><br \/>Valuation Methodology<\/strong><br \/>Trading  Ideas are based on the market\u2019s expectations, investors\u2019 positioning  and technical, quantitative or qualitative aspects. They take into  account the key macro and market events and to what extent they have  already been discounted in yields and\/or market spreads. They are also  based on events which are expected to affect the market trend in terms  of yields and\/or spreads in the short-medium term. The Trading Ideas may  refer to both cash and derivative instruments and indicate a precise  target or yield range or a yield spread between different market curves  or different maturities on the same curve. The relative valuations may  be in terms of yield, asset swap spreads or benchmark spreads.<br \/><strong><br \/>Coverage Policy And Frequency Of Research Reports<\/strong><br \/>Intesa  Sanpaolo S.p.A. trading ideas are made in both a very short time  horizon (the current day or subsequent days) or in a horizon ranging  from one week to three months, in conjunction with any exceptional event  that affects the issuer\u2019s operations. In the case of a short note, we  advise investors to refer to the most recent report published by Intesa  Sanpaolo S.p.A\u2019s Research Department for a full analysis of valuation  methodology, earnings assumptions and risks. Research is available on  IMI\u2019s web site (www.bancaimi.com) or by contacting your sales  representative.<\/p>\n<p>Source: BONDWorld &#8211; Intesa Sanpaolo \u2013 Research Department<\/p>\n<p style=\"position: absolute; left: -10000px; top: 0px; width: 1px; height: 1px; overflow: hidden;\" id=\"_mcePaste\">Normal 0 14       MicrosoftInternetExplorer4<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The sovereign debt crisis in the euro area worsened in 2011, with serious negative repercussions in real terms as well..&#8230;&#8230;&nbsp; &nbsp;<\/p>\n","protected":false},"author":2,"featured_media":3460,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"telegram_tosend":false,"telegram_tosend_message":"","telegram_tosend_target":0,"footnotes":"","_wpscp_schedule_draft_date":"","_wpscp_schedule_republish_date":"","_wpscppro_advance_schedule":false,"_wpscppro_advance_schedule_date":"","_wpscppro_dont_share_socialmedia":false,"_wpscppro_custom_social_share_image":0,"_facebook_share_type":"","_twitter_share_type":"","_linkedin_share_type":"","_pinterest_share_type":"","_linkedin_share_type_page":"","_instagram_share_type":"","_medium_share_type":"","_threads_share_type":"","_google_business_share_type":"","_selected_social_profile":[],"_wpsp_enable_custom_social_template":false,"_wpsp_social_scheduling":{"enabled":false,"datetime":null,"platforms":[],"status":"template_only","dateOption":"today","timeOption":"now","customDays":"","customHours":"","customDate":"","customTime":"","schedulingType":"absolute"},"_wpsp_active_default_template":true},"categories":[22],"tags":[],"class_list":["post-967","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-makrooekonomische-daten"],"blocksy_meta":{"styles_descriptor":{"styles":{"desktop":"","tablet":"","mobile":""},"google_fonts":[],"version":6}},"_links":{"self":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/967","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/comments?post=967"}],"version-history":[{"count":0,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/967\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media\/3460"}],"wp:attachment":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media?parent=967"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/categories?post=967"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/tags?post=967"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}