Eye-Opener: Factors as strong as gravity holding rates low and is parity close by for EURUSD?

EURUSD briefly traded below 1.05 this morning. At the same time, US yields can’t seem to break higher. The reason is strong demand, especially from non-US investors. Yesterday’s 10Y auction in the US had almost 59% allotted to indirect bidders, predominantly non-US investors. On the Euro side, we can see easily see both bunds below 20bps (it did go below yesterday afternoon) and the short swaps (against Euribor) going negative today.

The Swedish inflation expectations survey from Prospera showed no clear reversal of the trend of falling inflation expectations. This means that additional stimulus from the Riksbank is well on the cards, even though February CPIF inflation came out slightly higher than the central bank’s forecast.

Day ahead

It is also a relatively light calendar in the US and Europe today.

The most important data release will probably be US retail sales data for February. Our focus will as always be on the so-called control sales, which filter into GDP and exclude autos, gasoline and building materials. Following a surprisingly weak 0.1% rise in January the consensus forecast is looking for a 0.4% increase in control sales. Overall retail sales should rise a softish 0.3% as cold and snowy weather might have weighed on sales in some areas.


Another day, another hit on core Euro rates, with 10-year Bunds now below 0.21%. German 2-year bonds were auctioned at -0.24% yesterday, and the German curve is negative out to 7½ years. The ECB yesterday revealed that it purchased public sector bonds for EUR 3.2bn on Monday. Going forward, the ECB will provide weekly details on the purchases and with a more thorough rundown coming monthly.

Denmark held another fake T-bill auction yesterday and auctioned off nothing, as we had expected. This marks the third auction in a row where nothing has been allotted; all DKK 9bn bids were rejected yesterday.

Another milestone is approaching on EUR rates – the 1-year rate is very close to zero and yesterday traded as low as a fifth of a basis point. With Euribor futures trading above par yesterday as well, it is in our view just a matter of days before we will see the 1-year swap rate below zero. Further out on the EUR swap curve, 2s5s hit 17 bp and 10s30s went below 43 bp. All such values are low, but there’s no sense in going the other way just yet as the QE engine is running full speed. Our immediate bias for core EUR rates is flat to down.

US rates also fell yesterday (10Y to just below 2.10%), but in spread terms to virtually everything US rates soar. For each point of spread widening, US Treasuries look more and more attractive for non-USD investors. Case in point was yesterday’s auction in 10Y notes: Indirect bidders took 58.6% of the 21bn auctioned. Our stance remains the same here, and we have a bias for slightly falling US rates on the short horizon.

Italy is to sell 3-year, 7-year and 31-year risk tomorrow. The ECB don’t buy in the primary market, but it can’t even buy the latter next week as with a maturity of 1 September 2046 it is ineligible for the QE programme. That is bad business, in particular if they will eventually buy it back when the bond becomes eligible on 2 September. The Irish are a bit smarter, and sell 30-year risk with eligible (February 2045) maturity tomorrow. Spain is also in the market with 5-year, 7-year and 10-year risk.


The euro continues to struggle while the dollar is shining. The downtrend in EUR/USD is intact and a move below 1.05 looks imminent (indeed, the euro traded slightly below 1.05 earlier this morning). Today’s US retail sales will be the last important US data release ahead of the FOMC meeting next week. It would take a big disappointment to derail the current downtrend in EUR/USD and many investors would see a correction higher as a good selling opportunity. Hence, we see limited upside risk in EUR/USD.

The Swedish krona moved higher on upbeat inflation data. The surprise jump in core inflation from 0.6% to 0.9% lifted the SEK yesterday. And a soft euro is adding to downward pressures on EUR/SEK. Today’s Swedish unemployment data are usually not a big market mover and there will be few Swedish data the next fortnight. Hence, EUR/SEK will mainly take its cue from the euro sentiment with the main bias to the downside.

The Norwegian krone seems in a deadlock ahead of next week’s rate meeting at Norges Bank. A lower oil price provides the NOK with some headwinds while a soft euro is pulling in the other direction. Except for Norwegian trade data on 17 March, the calendar is empty ahead of the rate meeting on 19 March. Range trading is set to prevail until the rate decision unless oil makes a sharp move.