ECB Bond Buying Program Accelerates Euro Losses

ECB, Bond, Buying Program, Accelerates, Euro, Losses, fundamental, analysis, fx trader, forex

12 Mar 2015

The euro was trading $1.1150-$1.1220 a week ago. The launching of the ECB's bond buying program coupled with another strong US employment report jumped started the euro's slide, after consolidating mostly last month.

The euro slipped to just below $1.0725 yesterday. Comments from Jason Furman the Chairman of Economic Advisors to President Obama helped stabilize the euro. He acknowledged that the dollar's strength curbs US growth.

This is not new insight. Everyone recognizes this. However, why take it in isolation. There are other factors that help blunt the impact of the strong dollar. In her recent congressional testimony, Yellen noted that bond yields and oil prices have fallen. She argued on international factors are broadly balanced for the US. The dollar's rise is also partly a reflection of favorable developments in the US. 

As recently as last Friday, before the US jobs data, the implied yield of the December 2015 Fed funds futures contract was 45.6 bp. In response to the data the implied yield jumped to 58.5 bp. It is consolidating now. Hawkish comments by some a couple of regional presidents, one of whom is stepping down in a couple of weeks, failed to push the implied yield higher. Similarly, the US 2-year yield tested the pre-weekend high yesterday near 73 bp, but is now near 67 bp. 

More important for the dollar was the other side of the divergence story: namely the sharp decline in European bonds yields. Core and periphery yields are sharply lower. The 10-year German bund yield has almost been halved since the ECB meeting. Prior to the meeting the yield was near 42 bp. Today it is a record low 23 bp. Yields in the periphery have fallen by nearly as much, leaving the spreads little changed but yields lower across the board (leaving aside Greece as a special case).