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Forex pairs in this Article » EUR/USD (Barcelona) - Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ notes that the euro has drifted lower in part on the US data yesterday that continues to widen yield differentials at the long end of the curve.

He sees that the 10-year spread between the US and Germany is now at 78bps, a level that is more consistent with the euro trading below the 1.2500 level versus the dollar. However, he feels that the yield differential story at the short end is different with the expected EONIA in 2014-15 under upward pressure to a similar degree as the federal funds rate in the US. However, he sees that the euro appears to be still well supported by cross-border trade and investment flows, which was certainly the case as of April.

He continues, writing, “The BOP data for April, released last Friday revealed a euro-zone current account surplus of EUR 46.1bn in 2013 to April. Foreign investor buying of euro-zone securities totalled EUR 161.5bn in the same period while euro-zone investors bought EUR 132.5bn worth of foreign securities. There was a net FDI deficit in the first four months of 2013 totaling EUR 31.7bn, resulting in an overall basic balance surplus of EUR 43.4bn.”

Halpenny feels that this no doubt is probably one of the reasons why speculators shorting the euro haven’t had much joy. However, he is sceptical that investor inflows will persist at the same pace from here and speculators may easily be encouraged back into selling the euro as periphery uncertainties rise again. He finishes by noting that the latest story in today’s FT relates to potential huge losses in Italy (EUR 8bn) due to derivative trades taken out prior to 1999 in order to allow Italy to lower its deficit temporarily to below the Maastricht threshold – that covers a period of time when current ECB President Draghi was working in the Italian treasury department.
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