Something’s Changed About The Euro


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One of the big developments of late: The end of correlation between the Euro and “risk.” It used to be, of course, that the Euro was a risk currency that would rise whenever equities would rise, and so on.But that’s not been the case for a while now, and this morning marks a good example.

The Euro itself has been weak for the last couple of hours, with selling accelerating in the last several minutes.

But at the same time, equities have been moving up. Europe has mostly gone green.

In a morning note, JPMorgan discussed the shift:

A weak euro doesn’t have to be negative for stocks any more – for most of the summer, domestic equities and the euro were positively correlated.  Movements in the euro were taken as expressions of investor sentiment towards the region’s debt crisis (i.e. a higher euro signaled less fear of “tail” chaos and stocks benefited, and vice versa).  However, over the last couple months the two have started to be less correlated (US stocks are sitting near recent highs while the euro is close to recent lows).  Perceptions are starting to shift, w/a weaker euro now responding more to massive ECB accommodation/balance sheet expansion and less to sovereign fears.  According to data out in late Dec, the ECB balance sheet soared to a record EU2.73T (and balance sheet is up >EU550B in just the last few months  A bunch of recent commentaries/articles have talked about how the ECB has become very accommodative lately (Bill Gross called the 36m LTRO a “tidal wave of QE” Wed morning, Barron’s this weekend called the “LTRO a far more powerful signal to the markets than many suspect”, and the WSJ’s Marketbeat blog on Wed talked about “evidence pointing to the ECB running backdoor QE after all”  The trend of weaker euro has been in place for a couple months now (really since Draghi was named president and esp as the ECB balance sheet has started to explode in size) and is being driven more by easier CB policies (which is positive for risk assets) and less by sov credit fears.

The fact of the matter is that the Euro has always been a mediocre proxy for anything, even tensions in the Eurozone. Now though, it’s clearly doing its own thing.