2 Jul 2013
Flash: Sell the Euro? – Societe Generale
FXstreet.com (London) - Kit Juckes at Societe Generale said that paying 2yr/2yr US dollars and receiving in Euros remains one of his favourite trades and has performed much better than the actual 2yr rate spread, so far.
That makes sense eh said - the Fed isn't going to raise rates any time soon, the talk is merely of tapering. But it is the 2yr rate differential, not the 2y/2y forward differential, which tracks peaks and troughs in EUR/USD as he noted. When the EUR/USD (spot) 2-yr rate spread widened out to 13bp in mid- June, it helped EUR/USD rally to 1.3400, he added. “The spot rate spread has drifted lower but not fallen anything like as a sharply as the forward rate spread. Hence the Euro's glacial decline.”
He said he maybe reading too much into this but he thinks the forward rate differential tells him where the actual rate spread is going and therefore what will happen in due course in the FX market. So as boring as EUR/USD has been, he thinks everything is lining up for the next leg down, as long as I am patient enough. “A break of EUR/USD 1.30 could see an acceleration and indeed, the FX trade now looks more attractive than the rates one (though I hasten to add that they are both trades I like long term)”.
That makes sense eh said - the Fed isn't going to raise rates any time soon, the talk is merely of tapering. But it is the 2yr rate differential, not the 2y/2y forward differential, which tracks peaks and troughs in EUR/USD as he noted. When the EUR/USD (spot) 2-yr rate spread widened out to 13bp in mid- June, it helped EUR/USD rally to 1.3400, he added. “The spot rate spread has drifted lower but not fallen anything like as a sharply as the forward rate spread. Hence the Euro's glacial decline.”
He said he maybe reading too much into this but he thinks the forward rate differential tells him where the actual rate spread is going and therefore what will happen in due course in the FX market. So as boring as EUR/USD has been, he thinks everything is lining up for the next leg down, as long as I am patient enough. “A break of EUR/USD 1.30 could see an acceleration and indeed, the FX trade now looks more attractive than the rates one (though I hasten to add that they are both trades I like long term)”.