Euro racing car is just accelerating
The Euro's growth rate, which has added 10% against the dollar in the last 100 trading days, spurred talk of a kind of "cruel" currency movements, which the European Central Bank has repeatedly complained about in the past. But so far, they have been entirely calm - there hasn't been a mention of it.
After the shock of the pandemic hit the world economy, both sides may have to think about other problems.
The foreign exchange markets were mainly focused on the second currency of the pair - the retreat of the US dollar due to the end of the financial stress associated with the pandemic. The likely prospect of a further weakening of the DCA by the Federal Reserve, and the impending US elections.
But, aside from the European side of the equation, the growth of an internationally trade-weighted euro looks like a burn for a central bank trying to prevent deflation risks.
The Euro reached its highest levels in six years this week, growing by more than 7% in just 160 trading days. The last time it grew so fast was in 2017 - the then ECB head Mario Draghi warned that the steep rise in the currency was a "source of uncertainty" for price stability.
During its 21-year history, the ECB has regularly faced sharp jumps in the Euro.
Draghi saw growth of trade-weighted Euro by more than 10% in the 18 months before the beginning of 2014 as "a cause for serious concern" in light of low inflation.
And Draghi's predecessor, Jean-Claude Trichet, liked to use the word "brutal" to describe the Euro's sharp fluctuations, signaling central bank dissatisfaction - for the first time in early 2004 after growing 20% in 18 months and again in 2007.
But so far, ECB officials have made practically no mention of the euro movement.
In an interview with Reuters last month, ECB Chief Economist Philip Lane mentioned only how the central bank kept a close eye on the markets because he was concerned about the broader economic environment - both the markets and the central bank were on the same page.
Problems probably arise when people try to keep quiet about them.
With Germany recording an annual inflation rate of 0.0% on Thursday in July - well below the forecast - a rising Euro is unlikely to help the central bank meet its inflation target. Long-term market inflation expectations are barely above the 2% target.
However, corporate Europe also did not say anything about the currency, as it faces more severe problems, with profits falling sharply in the second quarter due to the pandemic.
Investors do not see any reason to worry either. The latest strategy updates of two of the world's largest asset managers - Blackrock and Amundi - barely mentioned Euro's rise, even though the former confirmed its preference for European stocks over American ones, while the latter lowered its view of the euro/dollar to "neutral."
Barclays believes that European equities and the Euro may continue to grow as they benefit from transatlantic investment flows and are justified by fundamental indicators.
Although it rose briefly above 10% during the pandemic crisis, the implied three-month volatility of euro/dollar options remains relatively depressed, just above 7% - half of the peaks achieved during the banking and euro crisis in the past 12 years.