Euro Dynamics – Stocks, Yield, Currency

We are seeing a dynamic relationship between German stocks, 2-year benchmark interest rates, and the currency—EUR/USD. The rise in short rates coincided nicely with a sell-off in stocks and a rise in the euro as you can see in the chart below: This is not what ECB Governor Draghi had in mind when with quantitative easing. In fact, rising rates and a strong euro counters the effectiveness of QE and likely leads to portfolio flow from international stock funds out of the Eurozone—the real economy in Europe needs rising stocks as rising stocks are a huge repository of collateral value; that is the direct feed-back loop to the real economy. Portfolio flow out of European stocks, money that was most likely hedged, i.e. short euro and long the US dollar, leads to the dynamic of pushing EUR/USD higher as the hedge is removed.