Eurozone weaknesses, including the ongoing threat of sovereign debt crises and plenty of banks that are believed to be insolvent, have led many people to predict that the euro should start to fall against the dollar, but investors taking a short position haven’t had much success. “The Japanese government bond market is famously known as a ‘widow maker,’ since shorting it has crushed so many macrotraders,” writes Gavekal Research Chairman Charles Gave.  But now, “it looks like the euro is competing to grab that title for itself.”

euro crisis

“If the euro is going up, it is probably because we have more buyers than sellers. Armed with this profound knowledge, we can start to try to identify who these buyers are,” writes Gave.

German exporters bill in dollars but pay bill in euros

He identifies two different groups of buyers who are putting upward pressure on the euro. First, German exports sent outside the eurozone are billed in US dollars, but the companies have to pay their bills in euros, meaning they are buying euros in large quantities. Since the euro is undervalued for the German economy and overvalued for France, Spain, Italy and others, this has the effect of giving Germany a further competitive advantage against its neighbors. “Needless to say, the Germans are willing to fight up to the last French or Italian soldier,” writes Gave.

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Japanese investors have bought €400 billion in debt YTD

The second major group of buyers are Japanese retail investors who have been purchasing huge amounts of eurozone debt. “As Japanese investors pile into euro-denominated debt (with gross purchases of nearly €400bn year to date!), they are obviously putting upward pressure on the euro, and downward pressure on the yen,” writes Gave. Since the European Central Bank has made it clear that it will do everything it can to prevent defaults along the periphery, including another round of LTROs, a lot of outside investors have been buying European debt, but just looking at the effect of Japanese investment gives a sense of the scale of these purchases.

“If we add up just these two categories alone—an approximation of euro purchases by German corporates and Japanese financing of the French deficit—we get €175bn in the past year. No wonder the euro has been going up,” writes Gave.