Letta Draghi Win Confidence as Euro Hits 1 36

Euro rallies across the board on breaking political and monetary news as:

-      Italian PM Letta wins a confidence vote in the Senate following Berlusconi’s U-turn to support the incumbent government after 25 dissidents from his party gave Letta’s government the numbers he needed for maintaining majority.

-      ECB president Draghi resorted to the usual adjectives of monetary dynamics remaining “subdued” and inflation expectations “well anchored”, without adding any particularly dovish remarks, which would have dragged down the forming euro.

-  Greece announced its 2014 budget with a debt deficit of less than 3% of GDP.

February 7^th & Now

Unlike in the February 7 press conference when the euro hovered near 2-year highs and Draghi talked down the strong euro, there was no need to do the same at today’s conference.  In Feb 7^th, EURUSD was up 12% from the July 2012 lows compared to only 6% today from the July 2013. Moreover, ECB excess liquidity was at € 497 million compared € 221 million today, reflecting stark improvement in credit and growth conditions.

Improved confidence over last February is also highlighted via the fact that peripheral spreads versus German 10-year yields are at least 50 bps lower than in early February.

Today, the euro is the 2^nd highest performing currency year-to-date behind the Danish krone out of the major 11 traded currencies, beating the pound, Aussie and the Kiwi. Over the last six months, it is the 2^nd best performer, behind the British pound.

Euro’s October Sun

Last but not least, the euro is the only major currency to have risen against the US dollar in every October since October 2009. And in over the last 10 years, EURUSD fell only three times in October; 2003, 2005 and 2008.

And we stick with our notion that the broadening weakness in the US dollar had been highlighted by the resilience of EURUSD in the face of the collapse of the Italian government and the possible implications of gaining access to financial markets. As USDX breaks below its May 2011 trendline, eyeing its 200-week moving average at 79.80, the road cements our view for $1.3720, $1.6450 against EUR and GBP respectively.