A weakening EUR (versus the US$) is a breath of fresh air for the Euro bloc.  What I think was the catalyst for this selloff in the Euro was the downgrade of Greece.  The Federal Reserve seems likely to raise rates before the ECB and the futures markets are pricing in this probability.  Market talk of the PIGS (Portugal, Italy, Greece and Spain) suggests continued economic weakness. For all the talk of the US as the epicenter, it is important to acknowledge the unique set of problems plaguing the EU. 

The German bond market has performed comparatively well: up 2.9% (through 12/22) year to date, versus -3.0% for the US bond market.  Stock market reaction is a bit mixed: German stocks are up 22.0%, French stocks are up 27.1%, and Italian stocks are up 21.4% – this compares with up 26.9% for US stocks.

Purchasing power parity for the EUR still suggests it is expensive: the PPP estimate provided by Bloomberg is $1.12. Based on current spot rates this implies an overvaluation of 21%. At current spot rate of $1.4274 it is approaching the 200 day moving average ($1.4193) it will be interesting to see if this support level is broken to the downside. If that is the case, the next support level is near $1.30.

This entry was posted on Tuesday, December 22nd, 2009 at 12:59 pm and is filed under Foreign Exchange, Market Talk. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.