17 Jun 2014
EUR defies yield spreads and spec sales - Westpac
FXStreet (Bali) - Richard Franulovich, FX Strategist at Westpac, notes how the EUR/USD is looking substantially overvalued vis-a-vis a couple metrics in the wake of the ECB's easing.
Key Quotes
"EUR/USD has resisted a decline in short term interest rate differentials that would have otherwise seen it depreciate sharply . EUR/USD initially decoupled from interest rate differentials in late 2013. However, the yawning chasm has grown yet further in June. As the slide below shows the two year Bund-Treasury spread has moved dramatically against EUR in June, yet the currency has shed a mere net 70 pips in value since then. This is of course not the first time EUR has resisted a narrowing in yield spreads. It is however noteworthy that EUR has ignored such a dramatic narrowing in yield spreads over such a short period of time."
"EUR/USD has also resisted aggressive speculative selling. The slide below shows EUR/USD against non-commercial IMM net positioning. Non-commercial net positioning stood at -57k contracts as of early last week, a hefty fall from close to flat as of mid-May. Casual inspection of the slide below suggests EUR could have fallen to the low-1.30s based on the preceding 18 month relationship between the exchange rate and speculative positioning. To be fair speculative flows are sensitive to interest rate differentials meaning that EUR has not necessarily defied two separate forces (i.e. yield spreads and spec flows)."
Key Quotes
"EUR/USD has resisted a decline in short term interest rate differentials that would have otherwise seen it depreciate sharply . EUR/USD initially decoupled from interest rate differentials in late 2013. However, the yawning chasm has grown yet further in June. As the slide below shows the two year Bund-Treasury spread has moved dramatically against EUR in June, yet the currency has shed a mere net 70 pips in value since then. This is of course not the first time EUR has resisted a narrowing in yield spreads. It is however noteworthy that EUR has ignored such a dramatic narrowing in yield spreads over such a short period of time."
"EUR/USD has also resisted aggressive speculative selling. The slide below shows EUR/USD against non-commercial IMM net positioning. Non-commercial net positioning stood at -57k contracts as of early last week, a hefty fall from close to flat as of mid-May. Casual inspection of the slide below suggests EUR could have fallen to the low-1.30s based on the preceding 18 month relationship between the exchange rate and speculative positioning. To be fair speculative flows are sensitive to interest rate differentials meaning that EUR has not necessarily defied two separate forces (i.e. yield spreads and spec flows)."