EUR: still some backing in the balance

November started just like October ended, with the EUR being on the back foot.
The EUR failed to capitalise on reports that Europe is set for mild weather this
month, which could keep a lid on gas and electricity consumption. Meanwhile,
comments from several ECB members including President Christine Lagarde
failed to bring any fresh food for thought. Today, the macro agenda gets busier,
with the late release of the final Eurozone manufacturing PMIs for October which
are likely to confirm their extended slump and subsequent rise in recession threats.
Nevertheless, hard data from Germany (external trade figures and unemployment)
could eventually attract more attention, especially as to whether the country was
able to retain a slight monthly trade surplus in September. In any case, the EUR
has already responded to this year’s sharp deterioration in the Eurozone external
position, as it continues to trade well below its reduced long-term fair value. While
the fate of the Eurozone’s trade balance should in the end largely hinge on whether
European energy prices are to persistently remain at high levels in the long run,
the EUR could still rely in the near term on the corollary of recurrent trade surpluses
for a decade, ie, eventually drawing down on foreign holdings in the event of
difficult times ahead. We are not there yet, but this is a key reason for not being
overly bearish the EUR going into the winter.

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