Why is the Euro so strong?

Taking in account the last troubles in Europe and the relatively "stability" here in the USA some people are scratching their heads trying to understand why the euro is still trading away above parity with the dollar.

If you have some experience trading currencies you know that trends are not based on single factors. Yet one of the most important factors ( if not the most important) is commercial demand.

The 3 charts below shows the current account per GDP on Japan, Eurozone, and in the USA.

Take a look where the zero line is.

Current account means the end balance after you subtract exports from imports.

Japan has a big positive current account meaning that to square their books the exporters exchange their dollars for yens which means buy the yen and sell the dollar.

The Eurozone current account does not look as good as Japan's but compared to the American current account it looks better so at the end of the day the european exporters also exchange dollars for their own currency meaning buying euros.


Because of many other factors the euro drops but it always pop up again because the current account is positive against the dollar.

As the dollar gets weaker and other geopolitical factors develop this imbalance can change but so far the Euro is more or less where it should be.

Above the dollar.

Nice idea but no this has a minuscule factor is determining the EUR. the trade balance in value fluctuates between -10bn and +10bn. These sums aren't very much when a lot of the 4tn a day is with euro.

The euro is not strong. Is euro strength defined by the EUR/USD rate? I think not. Look at a euro index chart. Do you remember Wayne Jackson, aka Jacko? He upset a few here and but gave others the ride of their lives LOLZ. So, pull up a euro index chart and consider Jacko's words.

If the graph on the chart starts in the top left hand corner and ends in the bottom right hand corner, the market is going DOWN.

Simple eh? The euro is going down so it's not strong. Why the E/U trades above parity, is a totally different question. The price is just a balance point between available and demanded euros versus available and demanded dollars. Should the ECB crank those presses up to save the countries that can't pay their own bills, there will be more euros in the market so price could drop to parity or even below.

The USD will always have the Triffin dilemma as long as it is the Reserve currency, so having a current account deficit is conductive to GLOBAL growth, as it provides GLOBAL liquidity.

running a current account surplus dries up global liquidity but is conductive to capital investment for the US, increased economic growth at a national level.

run a deficit= benefits the world hurts national competitiveness
run a surplus= hurts the world increases national competitiveness.

something along these lines, so looking at the trade balance alone is not enough

In an inter connected world you have to look at who gains and who loses with a weak or strong dollar/euro/yen/chf/cad/aud/gbp.

weak euro actually would help exports in the EZ but threatens inflation, but weak euro= strong usd and the fed does not want to contract exports, the yen wants to depreciate as well, and then china does not benefit from a weak euro as their goods would be more expensive relative to the yen.

no one benefits from a EZ implosion and chaotic break up.

So that means China is hurting the world and only caring for themselves, while the United States are hurting themselves for the benefit of others.. So the US are the good guys after all

no the US is not the good guy is not what i said.

but if you think about the Triffin Dilemma no matter who the holder of the reserve currency is , the problem still exists.

how do you provide global liquidity without a world central bank... by increasing the money supply of the reserve country and distributing it through a deficit.

now the country loses competitiveness via current account balance and the economy shifts to a consumer based, economy.

can you run a surplus and deficit at the same time?

Maybe it's best to think of the recent E/$ action as a repositioning of the pair, rather than a strengthening of the Euro:
http://www.telegraph.co.uk/finance/f...-the-euro.html

The charts shows current account "per GDP" if you look at the CC charts alone the difference is a lot bigger in such a way that can influence forex flows. I will post the charts later.

The reason I posted CC per GDP is to make more evident the "disparity" between a very strong currency (yen) and a mildly strong (Euro) against the dollar. Just look where the zero line is on the 3 charts.

Levels of strenght between those currencies matches perfectly with the charts and explains why the Yen keeps getting stronger independent of QE, BOJ intervention,low interest rate or what ever else happens in Japan.

The euro also gets stronger despite troubles and liquidity pouring in Europe.


Below you have another very strong currency against the dollar. Take a look on the CC chart. Note where the zero line is

It can't be a coincidence.

i wouldnt say the euro "strong" look at all pairs not just the euro the dollar is weak

I'm not saying that the euro is strong compared to other currencies, I'm talking about its relation to the dollar.

Despite the plethora of bad news from the euro zone, and the flood of euros provided by the ECB the pair refuses to go to parity or below it.

In my opinion it has a lot to do with the USA bad CC.

The euro is like a piece of foam in the water. You can push it down but it will always pop up again because the exporters are always converting dollars to euros. This situation will continue until the CC is positive to the euro zone.

I don't know but doesn't the Obama administration want to double U.S. exports by the end of 2014? Hard to do this with strong US dollar. The interest rate is already near its historic lows so I imagine the last thing Fed wants right now is strong US dollar.. And guess who's the biggest manipulator of Forex..?

Another interesting example.

The loony. Despite a relative lack of bad news on Canada, no real state problems and even a higher interest rate ( similar to the euro zone) the loony is oscillating around parity.

It correlates with their CC chart pretty well. It has being below zero steadily since 2009

I'd agree with jeremyws Euro exporters have little to do with Euro resilience. Exporters never show up in size on news wires who talk to interbank sales desks. The YEN on the other hand has exporters showing up in size on the regular making them a known player in UJ. The Euro's strength has less to do with the current account and more to do with investment flows. Private portfolio flows have been one of the biggest drivers from my observations. Money is flowing in the euro from central banks/private money who are diversifying their reserves/assets. Although the periphery states might be unattractive to investors German Bunds remain in high demand from those looking for a safe place to put money in the liquid Euro. CBs/private money are almost constantly on the bid looking to diversify into euros. They are reported on the daily by sales desks as being on the bid. ACBs accumulate reserves through controlling the exchange price of the CNY. Middle eastern nations accumulate through oils high price per barrel and diversify through sovereign wealth funds. Making them two of the largest players on the bid.

There's also speculation going on that repatriation have have also been underpinning support for the Euro. Banks who are losing money and need to meet capital requirements need to raise up money somehow. The most popular way to do this has been to sell off foreign assets to bring the money back home to get their balance sheets back up. I have not seen these guys show up as heavily in the market as diversifying CBs so I remain on the fence as to how much support they are providing. No conclusive evidence is out yet but time will show if they were there or not as this is the type of stuff banks love to research. There is SOME evidence supporting the speculation.

Top chart represent repatriation. Bottom one is portfolio flows.
http://i.imgur.com/p31ZJ.png

Note that when both the portfolio flows and the selling of foreign assets by banks slowed down the Euro finally got it's drop at the end of last year.

Nice post Tactical and it seems that you have a point.

Due to my trading stile (technical, day trading) I never spent too much time researching fundamentals so I can't currently agree or disagree with what you are saying.

I will keep studying it just for fun and maybe in a while I come up with the same conclusions you got.