We think there’s one EUR driver that matters and two that don’t in coming months. We don’t think ongoing strength in Euro peripheral fixed income matters. First, most of the recent inflows into the periphery originate from within the Eurozone. This partially reverses some of the unwind seen over the last two years. Second, redenomination risk has been close to fully priced out of EUR/USD according to our models. This explains why the correlation between peripheral yields and the euro are close to cyclical lows. Indeed, given the scale of the peripheral rally, the size of recent EUR/USD strength has been underwhelming.
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Deutsche Bank