We have been arguing that EUR/USD should weaken from these levels on the back ofpeaking equity inflows, a turn in rate differentials and building ECB verbal intervention. But what if the view is wrong? There’s three counter-arguments to our reasoning. First,even though US-EU rate differentials are busily widening across the rates structuremoney market rates are moving the other way. As LTRO prepayments continue andliquidity tightens, Euribor is making new highs. USD libor meanwhile is making freshrecord lows as dollar liquidity keeps rising. The move should reverse over the course ofthe year given US curve steepness and a dovish ECB. But for now, very short-dated(<1yr) forward points have moved in favor, not against the euro.
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