Strong European auctions fail to boost EUR as remains on rate outlook
Thursday’s auctions by Spain and France indicate that eurozone bond markets are likely to remain supported going forward. Spain raised EUR 4.5bn via 3, 5 and 10 yr issues with reasonable bid-cover ratios between 2.5 and 2.8. Meanwhile, France raised EUR 8bn via 2 and 5yr issues with bid-cover ratios of 2.24. Our eurozone yield spread indicator suggests that the EUR continues to appear oversold, with the metric indicating that EURUSD should be trading around 1.33 (see chart below). This undervaluation of the EUR, as well as a muted reaction in response to the strong auction results, suggests that investors are focused on the negative implications on the EUR of a ECB rate cut. The Bundesbank President Jens Weidmann said on Wednesday that the ECB may cut rates if additional information warrants such a move. Those comments by themselves are not new – the ECB already shifted to an easing bias at the April meeting and said it will closely monitor all incoming information. However, the fact that the comments were made by the most hawkish member of the Governing Council suggests the ECB is quite close to delivering a refi rate cut. Going forward, we therefore expect the market to focus on the eurozone data flow, particularly next week’s ‘flash’ PMI estimates and Germany’s ifo survey. Nevertheless, we view that EURUSD is attractive below 1.30 and continue to target 1.35 by mid-year.
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BNP Paribas