The Euro in perspective (FT Alphaville)

The euro’s annus horriblis

Posted by Tracy Alloway on May 27 08:18.

We’ve all seen the Four Bad Bears chart, now check out the European currency equivalent.

Courtesy of Danske Bank:

Danske says the eurozone crisis of 2010 has, in just five months, managed to make this year the worst for the euro since the single currency started in 1999. If it persists, it will be a tad unusual for the euro.

The eurozone currency has finished stronger against the US dollar in six out of the last 10 years of its existence. In four of them, the strengthening was over 10 per cent. Apart from 2008, which was a rather dramatic year for all markets, the last bear year for the euro was almost a decade back.

Here’s what Dankse’s John Hydeskov says:

Comparing the euro’s current slide with previous declines, we note that this year’s EUR/USD movement have some similarities to what happened in 1999 and 2000. In 2000, fears that the continued euro decline could set off a global financial crisis sparked G7 to intervene in currency markets. G7 finance ministers and central bankers said the action had been taken because of “shared concerns… about the potential implications of recent movements in the euro for the world economy”. One has to remember, however, that the euro traded at much weaker levels then – the coordinated G7 intervention raised EUR/USD from 0.85 to 0.90.

The ‘good’ news, according to the analyst, is that the euro’s current slide isn’t much different to previous extreme movements in the currency. Which means that we could be in be in for some consolidation.

Here’s Danske’s conclusion:

Comparing the most recent EUR/USD slide with other extreme movements we can conclude that it is unlikely that the pair will fall further and that a consolidation around the current spot level is the most plausible. A correction higher is an option but a move higher is unlikely to be as large as the decline was.

Implied volatility has risen dramatically and seems unlikely to rise much further. Volatility in late-April/early-May was perhaps too cheap but the recent rise appears somewhat overdone and can be reversed in the near term.

Others, of course, think very differently.

Related links:
RBS on central banks’ underwater EUR positions – FT Alphaville
Bonfire of the currency correlations – FT Alphaville
A quick guide to ECB intervention – FT Alphaville

This entry was posted by Tracy Alloway on Thursday, May 27th, 2010 at 8:18 and is filed under Capital markets. Tagged with currencies, euro, eurozone.