Yields on core European bonds went for a slide yesterday as prices rose in response to the ECB's decision to leave its QE programme unchanged – for now at least. Elsewhere, the USD continues to make gains on its peers.
Article / 07 June 2016 at 11:20 GMT

Daily Shot: What's holding up the euro? Team / Saxo Bank
  • ECB balance sheet approaching its 2012 peak
  • German factory orders drop sharply
  • UK's FX reserves have doubled since 2012

By Walter Kurtz*

Let's begin with a few developments in the Eurozone.

1. The European Central Bank balance sheet is approaching its 2012 peak – the central bank has been quite busy in May. The Eurozone's monetary base hit a new high.

Total assets

Eurozone's monetary base
2. The ECB action (above) combined with weak employment data out of the US sent the average yield on German government bonds below zero for the first time. 

German bonds
3. German factory orders dropped sharply, missing expectations by a significant margin. Both foreign and domestic demand has weakened.   

German factory orders
4. The short-term rate differential with the US suggests that the euro should weaken. However, the inflation-adjusted rate differential isn't as large. Combine that with a more dovish Fed and all the talk of the euro going to parity remains just talk... for now.  

Switching to the UK, the latest Telegraph poll shows Brexit vote going "down to the wire".   

This poll continues to keep FX markets on the edge, raising the British pound implied volatility to new highs. 

In the betting markets, the Brexit odds rose above 30%.

On another note, the UK's FX reserves have doubled since 2012. Would Brexit reverse this trend? 

FX reserves
— Edited by Michael McKenna

* Walter Kurtz is an alias

** This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot and select the appropriate command. E-mail addresses are never shared with anyone.


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