Here’s One Reason the Euro Hasn’t Gotten Crushed. Yet.

[20MillionDinar]

By Mark Gongloff

NOVEMBER 10, 2011, 2:47 PM ET

Here’s a fun fact you might not have guessed, if you didn’t follow the euro obsessively or for a living: The euro is actually higher on the year.

That’s right, at $1.36 at last check, the euro is up from $1.34 at the end of 2010. It’s well off its high for the year, set in May, of $1.48, but still well off its low for the year, set in January, of $1.30.

You read that right: The euro’s low for the year was in January. In fact, the euro has held up shockingly well in recent months, even as events in the euro zone have come to a head. Given the potential for nightmarish outcomes — including the end of the euro zone itself — you’d think the euro would be a lot lower.

One explanation that gets floated a lot for this is that European banks are selling foreign assets and bringing home euros to patch the gaping holes in their balance sheets left by sovereign-debt meltdowns. That has artificially bolstered the euro in its time of need.

Jens Nordvig, currency guru at Nomura, takes a look at this concept today and finds it about half-right: There’s been a lot of euro repatriation lately, but not necessarily by banks:

While we think deleveraging by European banks is crucially important in some EUR-crosses (EURCZK, EURHUF and EURPLN in particular), we don’t think it will drive EURUSD.

First, there is little evidence that European banks have been able to reduce assets meaningfully in recent months, based on timely US data.

Second, since European banks’ USD assets are generally funded in USD, there is no direct FX impact on EURUSD from this form of deleveraging.

But repatriation by Eurozone equity investors may have been an important support for EURUSD in recent months.

We don’t have all the official data yet, but our estimates suggest that $100-125bn may have been repatriated by Eurozone equity portfolio investors in Aug-Oct.

This is an outsized figure, and may have helped avoid a much bigger decline in EURUSD since August.

Looking ahead, we are skeptical that this repatriation flow will continue to provide strong support for the Euro.

Macroeconomic deterioration has already led to significant underperformance of Eurozone assets vs US assets (excluding FX effects)

The potential for more radical policies from the ECB may over time lead resident investors to seek ‘safety’ outside the Eurozone.

He still thinks the euro could get to $1.30 by the end of the year, with a risk of a bigger downdraft:

We are comfortable with our 1.30 end-year target for EURUSD at this point. But any evidence of capital flight from the Eurozone, would bring into play much lower figures.

http://blogs.wsj.com...d/?mod=yahoo_hs

Edited November 20, 2011 by 20MillionDinar