Further Fundamental Analysis on Euros Strength

In the meantime, the PIIGS are hard at work cutting their deficits for the benefit of the bondholders. Spain, for instance, has cancelled all sorts of public projects, and now Greek and Italy are following suit.


Euro Data released two days ago showed no change in the rate of unemployment across the Eurozone, which stood at 10% during June. Data for consumer price inflation across the Eurozone for July showed a pick up in the rate by three-tenths to 1.7%.


Despite the marginal miss on US GDP, which came in at a slower 2.4% between April and June on an annualized seasonally adjusted basis, the dollar is holding up relatively well. BUT  there is a critical effect on weakening Dollars with Bernanke recent statements.::-


Bernanke acknowledged FEW days ago that the US-economy faces an “unusually uncertain time,” but if necessary, he hinted the central bank would resort to “Quantitative Easing,” (QE), or printing vast quantities of US-dollars, in order to prevent a deflationary spiral. With the US federal funds rate pegged near zero-percent, Bernanke was asked by Senator Jim Bunning if the Fed is “out of bullets,” Bernanke responded, “I don’t think so. We are prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential and price stability.”, MEANING  keep printing Dollars at maximum capacity...

However, A so-called EURO bank stress tests,,  ,(84/91 passed)which ( propaganda tool ) helped to trigger a 100-bps slide in credit default swaps on Greek bonds, to 825-bps this week, and down sharply from a record 1,320-bps.

With CDS rates on Greece’s debt receding, the demand for the deficit ridden US-dollar has also waned. In addition to the Euro, the biggest winners in the anti US-dollar sweepstakes were the Australian dollar, Swiss franc, and the British pound. China took advantage of the US-dollar’s rally in May, by dumping $32.5-billion of its holdings of US Treasury notes to US$867.7-billion.

The yield spread between the US Treasury’s 10-year note, and the German Bund, tumbled by 60-basis points (bps) over the past seven weeks, eroding the value of the US-dollar index by eight-percent. German bund yields bounced slightly above their record lows of 2.50%, after it became increasingly apparent that the ECB is not inclined to cut its 1% repo rate anytime soon. The ECB engineered a recovery of the Euro, from a four-year low of $1.1850, to as high as $1.3045, while traders detected the central bank was phasing out its purchases of Greek and other sovereign debt, at a much earlier than expected date.

FROM THE ABOVE two charts, , you can see that Euros proves to be more responsive to rising bund yield than USDX (dollar index) is  to  US  BOND YIELD.
EURO/USD  correlation with German 10- year yield is around 0.900,, vs the -0.60 for the correlation between the USDX and US 10-year yield.


That means Euros/Usd  will rise further up in view of the rising German 10-year yield near term.