The relative macro, positioning indicators suggest EURUSD “oversold”, but for trend to change the “risk free” long term rates need to bottom…until then, keep commodity currencies long
Well, we can pretend that ECB’s Draghi is God, and changed the EURUSD trend. Or we may as well look at the data – admittedly, the worsening of the relative macro surprises has been the key driver of the EURUSD over the past few months…
Figure 1. Fair enough…
Good news to EUR: the spread is already close to historic lows. If the key market sentiment indicators – in particular, stock prices – erase the recent losses, the European PMIs (to be confirmed this week) should not fall much further, if history is to guide.
So will Draghi take the ice bucket challenge, and not deliver anything this week? Most likely (despite 5 major banks calling for a rate cut). He does though need to repeat his “we can do more” mantra (surprise!).
EUR has suffered excessively, in particular vs Asian currencies, which investors flooded into over the past 3 months – both as a “safe(r) haven” (from geopolitics); but also due to somewhat better macro data there. As recommended over the past few weeks, keep the commodity currencies long tactically. Caveat, though: short covering in EURUSD (on Draghi, or payrolls this week?) will likely be amplified by closing the long commodity FX positions. And to finish the, e.g., EURAUD decline (which is in its 5th wave down), we need to see the Treasury bond yields bottoming out. This will be consistent with the relationship explained before: as long as the US Treasury bond, German bund yields decline, the EURUSD will remain under pressure. Level around 1.30 is huge – it is also where the long term (from inception) uptrend for the EURUSD lies.
Figure 2. Keep long – but beware rising UST yields
Figure 3. Close to long term supports
The SNB faced some challenge too last week – and Jordan is on wire again this weekend reiterating that the EURCHF floor is needed. So beware, these levels where EURCHF is currently, the SNB is buying, to EUR benefit, just like in good old days of the euro area crisis. Don’t fight the SNB! If anything, the CHF is still hugely overvalued, one of the currencies which is strongest against EUR relative to pre-euro-crisis levels. And the real rates spread suggests EURCHF at 1.40. (Just saying)
Figure 4. Ideally…
The USD side this week will obviously be awaiting payrolls. We got used to the 200k+ number, so another one won’t matter. Also, the 2% y/y earnings growth – if sticky, no impact. Of course wages, especially upside surprise, matter more for the USD rates repricing now that Yellen has flagged her “pent-up-wage deflation” thesis. But while much of the US data has been positive lately, one trend is not: the puzzling rise of the US household savings rate, one of the overlooked factors playing in the USD support (yes, support)…
Figure 5. Deleveraging goes on?
Nordea