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Euro extends 2017 high and bonds drop on ECB taper talk

Mario Draghi is continuing to make waves across the markets.

The euro has set a fresh high for the year, investors are moving out of government bonds and exporters are leading losses on equity markets as speculation grows that Mario Draghi has opened the way for the ECB to reduce its economic stimulus.

The president of the ECB’s upbeat take on the economy, issued at the central bank’s annual conference on Tuesday, is still setting the pace a day later, despite his simultaneous calls for “prudence” in turning off the taps.

The euro has set a new high for 2017 to $1.1366, up 0.3 per cent, adding to the previous session’s 1.4 per cent advance. It is now up over 8 per cent for the calendar year.

The euro’s strength is being felt by major exporters, shares in which are making notable falls on the region’s stock markets, with the Xetra Dax in Frankfurt underperforming its peers, down 0.7 per cent. Infineon Technologies is down 2 per cent and the biggest single faller, followed by ThyssenKrupp, the steelmaker, down 1.5 per cent. The Euro Stoxx 600 is down 0.5 per cent, with the FTSE 100 down 0.3 per cent.

Investors are selling government bonds, sending yields on sovereign debt higher across the region and around the world, as the prospect of reduced activity in the market from the ECB sets the mood:

  • The yield on 10-year German debt is up 4 basis points to 0.39 per cent
  • The yield on 2-year Bunds is up 3 basis points at minus 0.56 per cent.
  • French 10-year yields are up 3 basis points at 0.75 per cent
  • Spain’s 10-year yield is up 2 basis points at 1.48 per cent
  • Portuguese 10-year paper is yielding 3.04 per cent, up 1 basis point.
  • The 10-year US Treasury yield is up 4 basis points at 2.23 per cent
  • The UK’s 10-year gilt yield is up 3 basis points at 1.13 per cent

The pound is down 0.1 per cent at $1.2803, while against the resurgent euro it is 0.3 per cent weaker at £0.8868.

George Saravelos at Deutsche Bank, who dropped his bearish call on the euro today says:

The European Central Bank and the Federal Reserve are losing control of the exchange rate.

With the Fed on a steady hiking path, our assumption was that this would matter more than ECB tapering because short-end rates have dominated FX moves since 2008. What’s more, we assumed the ECB would not want and could talk down a stronger euro. Both assumptions have proven wrong. The relationship between FX and relative rate differentials has completely broken down, with the euro continuing to rally against the dollar even as rate differentials point the other way.