So a quick note from the FX world on Thursday.
The euro is back – although today’s strength comes on the heels of a pretty steep slide catalyzed initially by a hawkish Fed and accelerated by jitters around the German election.
Here’s the big picture:
As noted in the annotation there, today’s rally was helped along by regional inflation data in Germany which, although mixed on the whole, still suggests scope for the ECB to move ahead with tentative normalization.
“Saxony’s CPI figures won’t cheer up the bond bulls amid this selloff,” Bloomberg’s Paul Dobson wrote once the numbers hit, adding that “the data show inflation, both headline (up a shade to 2%) and core (unchanged at 1.8%), remain robust and if anything slightly ahead of analyst estimates.”
As a reminder, Germany is running ahead of the euroarea as a whole:
Fortunately (for the equity bulls out there), any euro strength also serves to give Draghi pause for fear of accelerating the currency rally. Hence the perverse dynamic that’s developing in Europe where FX and yields are prone to being negatively correlated.
And that’s the irony here. Anyone looking for the bond selloff to abate should be hoping for a serious rebound in the single currency. Because the stronger the euro gets, the more likely is Draghi to be wary of leaning too hawkish. The less hawkish he is, the more bullish for bonds.
