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The Leisurely Euro: Following the Fed at a Distance

Posted by Joseph Trevisani on Jul 8, 2013 11:50:00 AM

The three week long decline in the euro following the June 19th Federal Reserve meeting has shaved 4.6% from its dollar value.

Currency and credit markets are anticipating the end of the central bank’s quantitative easing experiment later this year or next, perhaps starting as early as the mid-September FOMC meeting.

The yield on the 10-year Treasury has been forced relentlessly higher, 59 basis points since the June 19th FOMC and 114 basis points since the May 3rd low at 1.62, as the government market sells off ahead of any actual change in Fed Policy.

Though central bank interest rates cycles have historically been the most accurate predictors of currency valuation, it took euro traders almost six weeks to catch on to the move in US interest rates. Despite the steadily rising US rates, the euro rose against the dollar from 1.2797 on May 17th to 1.3416 on the June 19th, the day of the Fed  Open Market Committee meeting.  That is almost exactly the run that has now been reversed.

For much of that period currency markets may have been taking their cues from equities rather than bonds. From its low on April 19th through May 22nd the Dow gained 7.6%, and for half of that period the yield on the bench mark 10-year Treasury was rapidly gaining.

For equities illumination seemed to arrive on May 22nd, when Fed Chairman Ben Bernanke mentioned that if the economy continued to improve as the central bank expected quantitative easing purchases would soon begin to taper off.  Equities followed with three weeks of extreme volatility as traders tried to assess the timing of the Fed's intentions. 

Confirmation of the Fed's change of policy after the June 19th meeting sent the Dow reeling down 5% in four trading sessions.  Most of that has since been regained as  benign to positive economic statistics  have convinced the  markets that the US economy is strong enough to withstand the impact of higher mortgage and consumer rates that  follow the rise in Treasury yields.

Joseph Trevisani

Chief Market Strategist



Charts: Bloomberg

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