28 Oct 2013
Flash: Why is the Euro so strong?
FXstreet.com (London) - Kit Jukes, Global Head of Currency strategy at Societe Generale looks into why the Euro is so strong.
Key Quotes:
“It's partly because Euro interest rates are higher than US ones, and it's partly because the spread between Spanish and German bond yields is tighter than it has been for 2 and a half years. And the reason so many people are surprised by the Euro's strength is that few if any strategists or economists expected either of these things to happen this year. I certainly didn't”.
“And where do we go from here? If Euro 2yr rates stay above dollar ones and the 3yr Spain/German spread gets to 1%, fair value can get as far as 1.39. 1.40 is a rounding error away. And if we went back to a 2pct yield spread and a 2% rate spread in the next few years, fair value ‘should' fall to 1.20. Both are possible, in that order”.
“Does this help calm markets? The squeeze goes on, but as we can see again today the air is pretty thin up here. The lack of volume suggests people are slowly being squeezed out of shorts but no-one is rushing to get long the Euro. So we grind. But the conditions for the fair value to turn downwards - a reversal of relative rate trends or an outbreak of risk aversion in peripheral Euro Area bonds - are absent”.
Key Quotes:
“It's partly because Euro interest rates are higher than US ones, and it's partly because the spread between Spanish and German bond yields is tighter than it has been for 2 and a half years. And the reason so many people are surprised by the Euro's strength is that few if any strategists or economists expected either of these things to happen this year. I certainly didn't”.
“And where do we go from here? If Euro 2yr rates stay above dollar ones and the 3yr Spain/German spread gets to 1%, fair value can get as far as 1.39. 1.40 is a rounding error away. And if we went back to a 2pct yield spread and a 2% rate spread in the next few years, fair value ‘should' fall to 1.20. Both are possible, in that order”.
“Does this help calm markets? The squeeze goes on, but as we can see again today the air is pretty thin up here. The lack of volume suggests people are slowly being squeezed out of shorts but no-one is rushing to get long the Euro. So we grind. But the conditions for the fair value to turn downwards - a reversal of relative rate trends or an outbreak of risk aversion in peripheral Euro Area bonds - are absent”.