Wednesday, December 2, 2015

"Money Fleeing Europe’s Negative Yields Will Boost Dollar To Parity With Euro"

From Barron's Focus on Funds:
It’s a critical week for dollar bulls. Or, perhaps, the dollar is already an unstoppable force on an upward trajectory.

Many investors expect another leg higher for the dollar to materialize Thursday, assuming that European Central Bank President Mario Draghi can meet lofty expectations for additional monetary stimulus.

The PowerShares DB US Dollar Bullish exchange-traded fund (UUP), a proxy for the dollar relative to a basket of world currencies, is perched near its highest level in over six years. The euro is near its lowest level versus the greenback in over a decade.

Longer term, however, Deutsche Bank forex gurus George Saravelos and Robin Winkler contend that tectonic plates are already in motion to drive the euro lower versus the dollar. The point to record outflows of investor money out of European income funds over the past year. That money, they say, is making its way to the U.S. bond market, a “euroglut” likely to drive euro/dollar weakness for years. Draghi’s measures have already driven yields on the German two-year Bund to around -0.4% versus about 0.95% for the two-year Treasury. They explain:

“The Euro zone has experienced a historically unprecedented shift in portfolio flows, with net fixed income outflows running at a staggering 500bn EUR over the last twelve months, the largest on record.
These flows are mostly directed towards US bond markets and have exceeded the Eurozone’s current account surplus. They have pushed the basic balance into deficit over the past year contributing to EUR/USD weakness....MORE
Yesterday FT Alphaville also riffed off of Saravelos in "How the ‘euroglut’ thesis became a reality".