FX: Sinking Euro

October 31st, 2013 5:06 pm | by John Jansen |

The US dollar was a superstar today versus the Euro currency and the Euro cratered versus Sterling, Yen and Aussie. One aficionado of the FX market described the circumstances of the Euros decline.

On the US side he suggests that market participants over thought the FOMC. Many players gazed at the calendar and pronounced March 2014 as the tightening moment. There were many reasons for that belief. The shutdown toyed with the numbers and upcoming data through December will be “dirty”. In January there will be a hand off of leadership with the installation of Ms Yellen as head of the Fed and participants have viewed that as an inopportune moment. Some had expected that the FOMC statement released yesterday would entail the FOMC waving a white flag and rolling over for those who expected QE to last into eternity. Instead, while they did not get hawkish prose, they received a statement which was less dovish than expected and which remained data dependent. There was no surrender.

Separately in Europe data has turned weak as evidenced by core CPI YOY at 0.8 percent and an unexpectedly weak employment report. So, my interlocutor notes that the belief that the ECB might actually ease is now considered possible. He noted that in the last two days there has been an outsized move in vol on the Euro and in his experience the move in vol the last two days is indicative of a market anticipating a change in interest rate differentials.

Finally, month end machinations would also have been a factor in the sharp decline of Euro today.



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