Euro 8217 s Ascent Between Now amp Then

As EURUSD hits 8-month highs, we compare today’s fundamental dynamics with those of early February-when the EUR peaked at 1.3711 before losing 7% in the ensuing 2 months.

3 Differences between February 2013 and now.

- February-March signalled the breakdown in the inverse relation between equities and the US dollar as US growth was anticipated to lead the global economy into recovery and the Fed expected to be the first major central bank to normalize policy (tapering). Although Eurozone commercial banks had already began repaying LTRO loans, signs of growth remained focused in core nations. This led to a decoupling between EURUSD away from equity indices, causing a 15% rise in the US dollar, alongside a 7% gain in the S&P500 over the subsequent 3 months.
Today, signs of economic stabilization indicate a hardening recovery in Germany as well as stabilizing rate of contraction Southern Europe. Even Greece announced its 2014 budget deficit at less than 3% of GDP.

- In February, the Fed was two months into QE3, but the FOMC minutes at the time had already begun revealing internal dissent with prolonging the $85 bn in monthly purchases. This had even led to preliminary predictions that tapering would begin in June.
Today, the fiscal reality in Washington and the growing possibility of another budget showdown as early as January shuts the door in the face of those FOMC members supporting a reduction in the $85 bn in monthly purchases. And since tapering chatter has proven to be the only realistic dynamic responsible for raising the cost of federal debt, terminating the debate on tapering during the lingering govt shutdown is paramount.

- Contrasting German -US yield differentials. In early February, the spread between German and US 10-years was at -0.33% (Germany minus US) and was in a clearly falling trajectory (see chart).
Today, the German-US spread is at -0.73%, but is on a rising trend. With EURUSD at 8-month highs and German-US spread at only 4-month highs, we could expect the bond market to lend further support to EURUSD if the marked improvement in Germany’s business surveys is accompanied by the slow signs of improvement in the Eurozone.

The road to $1.3700 this time around, may not be interrupted by a sudden reversal as was last the case in February when ECB’s Mario Draghi talked down the currency in that infamous press conference. Expect prolonged consolidation to center around 1.3500-1.3700 into month-end, with short-lived spikes at 1.3820.

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