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Foreign Exchange

FX comment: Where is the EU going?

Monday dawned with news of the dramatic measures announced by the EU and the ECB to stave off further debt-crisis contagion. EUR/USD rallied from a low of 1.2520 on Sunday evening to as high as 1.3093 early Monday before retracing by nearly 50% to 1.2820 by the afternoon; by Tuesday afternoon EUR/USD had drifted below 1.2700. The question is: “Where now?” The answer, with a couple of exceptions, is: “Lower.”

Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ published a note early on Monday whose title made his opinion plain enough: Massive policy shift will only temporarily lift EUR. Halpenny highlighted the about-turn by the ECB as early as Thursday about a bond purchase programme and the panic (my word) reinstatement of fixed-rate tenders and dollar liquidity swap lines to conclude: “These are clearly astonishing shifts from both eurozone officials and from the ECB that appear a clear attempt to shock the financial markets back into normal functioning. But we recently became more bearish on the EUR, not in the belief that the eurozone would implode but in the belief that a mix of tightening fiscal policy in the region would be coupled with looser than anticipated monetary policy by the ECB. We stick with that view and indeed the shift from the ECB this weekend will have the market pondering the idea that the stance of the ECB will be far more accommodative than expected and for far longer, leaving the euro locked in its current downtrend.”

Bank of New York Mellon’s commentary by Neil Mellor was also somewhat less than taken with “a ‘shock and awe’ display”.

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