9 Aug 2013
Flash: EUR/USD favored by unlikely source – Westpac
FXstreet.com (New York) - Richard Franulovich at Westpac points to the relationship between the EUR/USD and the impact of yield spreads as a means of predicting short-term movements.
Key quotes
As Fed tapering expectations have firmed long-term yield spreads have shifted notably in the USD's favor – the 10-year bund-treasury spread for example has effectively doubled in barely 3 months, to -90bp versus -46bp as recently as late April.
“At current levels the 10yr bund-treasury spread is at its widest levels since mid-2006. However, the EUR/USD has been surprisingly immune to what at face value has been a damaging loss of yield support. In fact EUR/USD is on balance stronger over the same period.”
However, “EUR/USD's relationship with long-term yield spreads has always been spotty. Simple correlation analysis suggests that shorter-term maturity spreads have consistently been more significant for this pair than long-term spreads. As the slide below shows it's a fairly open and shut case. And, even as tapering expectations have firmed short-term yield spreads between core Europe and the US have if anything shifted in EUR's favor in recent weeks.”
Key quotes
As Fed tapering expectations have firmed long-term yield spreads have shifted notably in the USD's favor – the 10-year bund-treasury spread for example has effectively doubled in barely 3 months, to -90bp versus -46bp as recently as late April.
“At current levels the 10yr bund-treasury spread is at its widest levels since mid-2006. However, the EUR/USD has been surprisingly immune to what at face value has been a damaging loss of yield support. In fact EUR/USD is on balance stronger over the same period.”
However, “EUR/USD's relationship with long-term yield spreads has always been spotty. Simple correlation analysis suggests that shorter-term maturity spreads have consistently been more significant for this pair than long-term spreads. As the slide below shows it's a fairly open and shut case. And, even as tapering expectations have firmed short-term yield spreads between core Europe and the US have if anything shifted in EUR's favor in recent weeks.”