The euro has taken a proper beating, but at 1.1200 the trade is starting to look less like a free-fall and more like a market that now needs another reason to keep selling.
Takeaways
• around 1.1200 is no longer trading a clean European growth scare. Germany has upgraded its growth outlook, industrial production is firmer and the ECB tightening story remains alive, which means the bears now need fresh bad news rather than another replay of the same fiscal and energy fears.
• China is becoming the cleaner external risk for the euro. Europe is edging toward tougher trade measures just as Beijing pushes back against the idea that an undervalued renminbi is driving its export machine, leaving the euro vulnerable if the talks tip from diplomacy into retaliation.
• The renminbi is quietly cushioning Asia from the dollar rally. is up around 3.3% from its September low, yet the dollar is only 0.7% higher against a broader Asia FX basket, a clear sign that stronger PBOC fixings are helping keep the regional pressure contained.
• The yen remains a flow problem wrapped inside a policy story. Foreign investors are returning to , but record NISA-linked buying of foreign equities is sending Japanese savings abroad at an annualised pace near JPY16trn, leaving the BOJ fighting a steady offshore current beneath the surface.
Euro Finds a Floor
The euro has taken a proper beating, but at 1.1200 the trade is starting to look less like a free-fall and more like a market that now needs another reason to keep selling.
EUR/USD has already absorbed higher global yields, renewed French fiscal anxiety and the old European terms-of-trade wound reopening through higher diesel and natural-gas prices. That was enough to drag the pair down from around 1.1600, but the macro underneath Europe is refusing to deteriorate as quickly as the price action would have you believe. Germany’s Economy Ministry has lifted its GDP forecasts to 1.3% this year and 1.1% next year, from 0.5% and 0.9%, while August rose 2.0%, helped by defence and technology-related orders.
A French deficit problem becomes a euro problem when it starts changing the price of capital elsewhere in Europe, altering the relative performance of European risk assets, tightening financial conditions across borders and shifting the expected reaction function of the ECB. Once those channels begin moving together, the currency is no longer looking at Paris in isolation; it is discounting a bloc-wide macro shock.
Goldman’s historical work makes the point even cleaner. EUR/USD and the euro trade-weighted index have been materially more sensitive to the common component of sovereign spread moves than to the idiosyncratic component. In other words, the market has spent the post-Covid period distinguishing fairly well between “one country has a problem” and “Europe has a problem,” and the currency response becomes much larger once that second bucket starts filling up.
For FX, the message is not that Europe has suddenly become a growth story. It is that the market has already spent a lot of energy pricing the opposite, and the bears now need something fresh. If the economy keeps holding together while the ECB remains in tightening mode, the euro starts to find a little more floor under its feet, not because the backdrop is pretty, but because the downside story is becoming less one-sided.
The next real pressure point might be China, although I would caveat that by saying the French risk premium is unlikely to leave the euro anytime soon, and the tail still looks vulnerable to a test of 1.1100 if French fiscal stress flares and morphs into outright Eurozone contagion again. That means any stabilisation around current levels should probably be treated as conditional rather than clean, with China adding another layer of risk rather than replacing the French one.
A European delegation is in Beijing trying to stop the trade relationship from slipping out of the diplomatic lane, with Trade Commissioner Maros Sefcovic meeting Chinese Commerce Minister Wang Wentao just as the PBOC pushes back against the claim that a cheap renminbi is behind China’s huge trade surplus. Beijing’s argument is that the export surge owes more to manufacturing competitiveness than currency manipulation, and there is plenty of truth in that, but the FX angle is harder to dismiss.
The renminbi is still cheap on broad measures. MUFG notes that the BIS real effective exchange rate remains 14.5% below its 2022 peak, while IMF estimates put undervaluation somewhere around 12% to 20%. That does not explain the whole Chinese export machine, but it certainly gives manufacturers another tailwind when they are already winning on scale, cost and speed.
That is where the trade discussion starts to matter for EUR more than another round of polite communiqués. Europe is considering a more flexible mechanism that would make it easier to impose import caps or additional tariffs on Chinese goods, while Beijing is giving very little sign that it intends to concede the currency point. If those talks harden into retaliation, Europe suddenly has another terms-of-trade problem at exactly the moment the euro is trying to stabilise.
That is the rub. Europe can probably absorb mediocre Chinese demand; it has a harder time absorbing a flood of cheap imports while energy costs are rising and domestic manufacturers are already fighting for margin. If the trade channel turns nastier, the euro bears get the fresh catalyst they have been waiting for. If it does not, then EUR/USD around 1.1200 starts looking increasingly like a market that has already paid for a fair amount of bad news.
The irony is that Beijing itself is quietly leaning the other way in FX. Recent PBOC fixings have favoured a firmer CNY despite the broader dollar rally, and that matters because it is helping Asia FX dodge the full punch from the DXY rebound. The dollar index is up around 3.3% from its September low, yet the dollar against a broader basket of Asian currencies is only about 0.7% higher.
That spread is not noise. It is telling you that CNY is acting as a shock absorber for the region, keeping the dollar steamroller from flattening everything in its path. has already fallen roughly 10% from the January high, and if Beijing continues leaning toward renminbi strength, there is still room for that cross to grind lower even if EUR/USD itself starts to stabilise.
Japan is a different beast entirely, because the yen is increasingly being driven by what Japanese money does rather than what policymakers say.
September flow data showed foreign investors buying roughly JPY3.1trn of Japanese bonds, a meaningful reversal after three straight months of selling. That coincided with another BOJ hike and better 10-year and 30-year auction results, suggesting that confidence in JGBs is improving at the margin. In another cycle, that would probably be enough to give the yen more of a lift.
The problem is that Japanese households are running a parallel trade in the opposite direction.
Investment trusts bought around JPY1.36trn of foreign equities in September, taking the three-month total to nearly JPY4trn, a record. Annualised, that is close to JPY16trn, or roughly $100bn, moving offshore through a channel that has become increasingly important since the expansion of NISA.
That is not background noise; it is a structural current running against the currency.
The BOJ can tighten, foreign investors can return to JGBs and auctions can improve, but if Japanese households keep converting domestic savings into foreign equities, the yen is still trying to swim upstream. That is why trading JPY purely through the rate-differential lens keeps leaving people frustrated: the policy tide may be turning in its favour, but the household flow keeps pulling it back out to sea.
Tokyo clearly sees the problem. Prime Minister Takaichi has talked about strengthening retail demand for JGB products, while Finance Minister Katayama has previously floated the idea of making government bonds eligible for NISA accounts. That could matter far more than another carefully worded BOJ speech because it would finally give households a tax-advantaged domestic alternative to sending savings overseas.
If that ever becomes policy, the yen story changes at the margin because the structural leakage begins to slow.
So the FX board is getting more interesting beneath the headline dollar move. The euro has been battered, but the European growth story is proving harder to break than the price action suggests. China is keeping CNY firmer than the broad dollar backdrop would imply, while Europe risks opening a fresh trade front. Japan, meanwhile, is discovering that attracting foreign capital back into JGBs is only half the battle if domestic households keep exporting savings through NISA.
That is where the edge sits now.
For EUR/USD, the question is whether trade friction and energy can deliver the next leg lower before better European growth squeezes the short. For EUR/CNY, Beijing’s firmer hand on the currency still argues for pressure lower. And for the yen, the real fight is no longer just BOJ versus Fed; it is BOJ versus household outflows.
In FX, rates may set the weather, but flows still decide who gets wet.
