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Euro Erosion

| 10 November 2010 10:45

Irish woes appear to be the main culprit dragging the euro down to its lowest level since Oct 20.  A break of the $1.3650-80 area could signal another two cent decline in the coming days.

The flight into German bunds for safety is helping the dollar via the interest rate differential channel.

We use the 5 and 20 day moving averages to identify the underlying near-term trend and the euro’s break is seeing the 5-day moving average cross back below the 20-day.  Although this generated some a couple of false signals as the euro has was consolidating in recently, the momentum of the break suggests this is the real signal and the risk is euro losses will mount.

The other two indicators we have been monitoring also bear this out.  The 2-year interest rate differential is at 53 bp today in Germany’s favor down from 67 bp in late Oct.  And the price investors are paying for euro puts (insurance on long exposure) over euro calls continues to grow.

About Marc Chandler

Marc Chandler joined Brown Brothers Harriman in October 2005 as the global head of currency strategy. Previously he was the chief currency strategist for HSBC Bank USA and Mellon Bank. In addition to frequently providing insight into the developments of the day to newspapers and news wires, Chandler's essays have been published in the Financial Times, Barron's, Euromoney, Corporate Finance, and Foreign Affairs. Marc appears often on business television and is a regular guest on CNBC.

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