9 Jul 2015
Fed policy to drive EUR/USD beyond bund selloffs and Greece – Nomura
FXStreet (Barcelona) - FX Strategists at Nomura expect EUR/USD to resume its depreciation post the bund selloff and Greek developments as Fed gears up for a rate hike this year.
Key Quotes
“After sharply depreciating in Q1, when expectations for ECB easing increased and fixed income outflows accelerated, EUR/USD has been trading in a range recently. Selloffs in bunds and the European bond market since late April have triggered EUR short squeeze, while higher uncertainty around Greek political developments also makes the EUR’s trend unclear at the moment. In the short term, Greek developments will remain a key driver of EUR volatility.”
“While Greek developments have become a dominant factor for the EUR for now, the bund market has been more stable, and EUR short positions appear to have declined significantly. The correlation between EUR/USD and the German 10yr yield has also started declining somewhat.”
“Beyond bund selloffs and Greek developments, we expect the EUR/USD to resume its depreciation. As the ECB is now close to an interest rate floor, short-term rate spread – which historically has been more important for EUR/USD than long-term rate spread – will be dominated by the Fed’s monetary policy (and market expectations regarding that policy) going forward. We expect stably low short-term yields in the euro area, which has been the case even amid bund selloffs, to remain intact.”
“The latest conservative market pricing for the Fed rate hikes by year-end points to significant room for EUR/USD depreciation ahead, in our view.”
Key Quotes
“After sharply depreciating in Q1, when expectations for ECB easing increased and fixed income outflows accelerated, EUR/USD has been trading in a range recently. Selloffs in bunds and the European bond market since late April have triggered EUR short squeeze, while higher uncertainty around Greek political developments also makes the EUR’s trend unclear at the moment. In the short term, Greek developments will remain a key driver of EUR volatility.”
“While Greek developments have become a dominant factor for the EUR for now, the bund market has been more stable, and EUR short positions appear to have declined significantly. The correlation between EUR/USD and the German 10yr yield has also started declining somewhat.”
“Beyond bund selloffs and Greek developments, we expect the EUR/USD to resume its depreciation. As the ECB is now close to an interest rate floor, short-term rate spread – which historically has been more important for EUR/USD than long-term rate spread – will be dominated by the Fed’s monetary policy (and market expectations regarding that policy) going forward. We expect stably low short-term yields in the euro area, which has been the case even amid bund selloffs, to remain intact.”
“The latest conservative market pricing for the Fed rate hikes by year-end points to significant room for EUR/USD depreciation ahead, in our view.”