The euro has shed six cents over the past seven sessions. There are two main forces. The primary one arguably is within Europe itself. After an extended flash crash that saw German 10-year yields jump (from 5 bp on April 17 to almost 80 bp in the first half of May), they have come back (to 53 bp today). The ECB confirmed what many had suspected. Namely, that the ECB will expedite its bond purchases ahead of the thinner summer markets.
There are two separate but related developments lifting the euro to its best level in three-months against the US dollar.
First, the US economy is off to a disappointing start to Q2 after it appears to have contracted by around 1% annualized pace in Q1. The strong bounce back after the contraction in Q1 14 has thus far not materialized.
Tajikistan’s government is struggling to prop up its currency amid downward fiscal pressure emanating from Russia. Dushanbe’s policies appear to be creating a black market for currency traders with potentially long-term repercussions for the ailing economy.
In recent years, Argentina has come to be known for its highly volatile currency values and myriad problems with its banks. As a result, many in Argentina find themselves wishing for a more stable and secure currency and banking system.
Bitcoin is a form of “digital currency” (or “cryptocurrency,” as some call it, due to its encrypted, highly secure nature). Often synonymous with illegal dealings in the United States, thanks in large part to illicit websites like The Silk Road, Bitcoin has only just begun to make an impression on the American consumer.
The price of gold is essentially unchanged from where it finished last year. There have been several interesting developments. Of particular note, China, India and Russia were significant buyers last month.
It appears that the UK exported gold to Switzerland, where it was refined and then shipped to China and India. Russia continues to accumulate gold even as its hard currency reserves fall.
The financial media’s look at yesterday’s Treasury report on capital flows is myopic. The key take away, they say, is that for the first time since the onset of the global financial crisis, Japanese investors hold more Treasuries than Chinese investors.
The attention of financial markets often gets fixated on an index of measure and not on the effectiveness, purpose or the objective of the measure. The dollar index, in its current form, practically from 1973, is a classic case on it.
For global equity investors what worked so well last year is struggling to work this year. Last year, the S&P 500 was the place to be. It gained nearly 11.5%. The Dow Jones Stoxx 600 was up 4.3%. The MSCI World Index that covers the developed markets rose just shy of 3%. MSCI Emerging Market equity index lost 4.6%.
This year is a dramatically different story. As this Great Graphic, composed on Bloomberg shows, the Dow Jones 600 has exploded (fuchsia line), rising a little more than 16% in Q1 15.
At the end of each quarter, the IMF reports on currency reserve holdings by central banks for the preceding quarter. What investors are most interested in is the currency allocation of those reserves.
Not all central banks report the allocation of their reserves. Indications are that China, the world’s largest holder of reserves, does not report the allocation of its reserves. If it wants the yuan to be included in the SDR basket, it is probably a good idea to adopt the IMF’s best practices.
It is precisely because the euro’s decline is over-determined that the slide has accelerated. It is not just that the ECB is buying sovereign bonds. It is not just that the strength of the US labor market has persuaded more participants that the Fed will lose its “patience” (as in forward guidance) next week. It is not just that European officials have yet to convince investors that EMU is irreversible. It is the fact that all three forces are operative.
