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Euro's performance down to EU policy negatives not strength of dollar

Publication Date: 19 Mar 2019 - By ReachX Team By ReachX Team
Actionable
Differentiated

Macro FX & Rates FX UK USA EU ex-UK

The lacklustre performance of the euro versus the dollar is down to European policy and political uncertainty, rather than the relative strength of the greenback, according to a leading City analyst.  

In a note to clients, Kit Juckes, Head of FX at Société Générale, said the EUR/USD tracked short-term rate differentials pretty well from 2004 until the financial crisis, when measures of volatility started to matter more. “The European sovereign crisis saw swings in peripheral yield spreads grow in importance and the move to negative rates and bond-buying in 2015 saw EUR/USD follow real long-dated yield differentials much more closely than short-dated nominal ones.” 

But that relationship collapsed in mid-2017. “Over the last two years, there's a better correlation between EUR/USD and the BTP/Bund spread, or just the Bund yield, than any measure of relative European/US rates or yields. If this tells me anything, it's that the outlook for the euro has as much, and probably a lot more, to do with European issues (political, economic and policy) as it has to do with what's going on the US,” Juckes added. 

“Perhaps it's not surprising then, that with major fiscal policy easing not under consideration (despite being the obvious cure for the current economic weakness,) with Brexit uncertainty continuing and with the ECB hamstrung, the euro can't get much joy from lower US bond yields and the danger of weaker US growth.” 

The euro is cheap and staying cheap until something changes in Europe, the SocGen expert added.

In the meantime, the cross is still on track for the smallest quarterly range since the single currency was created and, for good measure, current levels are almost exactly in the middle of the year-to-date range. 

“No wonder EUR/USD volume is drifting steadily lower - a trend that I suspect will persist because there is limited downside for the euro here, but upside is only on offer when growth prospects improve and Bund yields rise,” Juckes concluded. 

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

ReachX Team

 

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