FXStreet (Barcelona) – Kit Juckes of Societe Generale, shares the two key factors driving EUR/USD – US data and Fed tightening, Bund rally.
Key Quotes
“The euro is a capricious currency, happy to laugh in the face of those (us included) who thought the fall to EUR/USD 1.10 yesterday was just a stepping-stone en route to a lower level. The bounce may be the effect of overwhelming bearishness that has exhausted the supply of potential sellers. It certainly reflects confidence (or complacency) that Greeks will vote ‘yes’ for austerity and get their bailout back on track.”
“But against this backdrop, the love affair between EUR/USD and the 10-year EZ/US rate spread is astonishing. It won’t last but for now, it dominates all other factors. Why did the euro bounce? Mainly because US yields fell more than European ones. It looks, glancing at that chart, that simple.”
“Of course, on this logic, the driver of EUR/USD still hinges on two factors only indirectly affected by Greece. Firstly, will the US data this week push the Fed in the direction of tightening regardless of spillovers to risk sentiment (in Chinese equities in particular)? And secondly, is the Bund rally getting going again? Of course, Greece has a role to play there but if we still think the Fed is going to hike in September, and still think Bund yields are now capped, then we want to be short euros, mostly against the yen, but partly against the dollar too.”
“On another point, the recent FX price action again demonstrates that the cross-asset high correlation regime that prevailed after the 2008 crisis has ended. Falling global stocks no longer mean automatic dollar strength, and vice-versa.”
(Market News Provided by FXstreet)