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16 Dec 2014
The path to a lower EUR/USD is clearing – SG
FXStreet (Barcelona) - Kit Juckes, Global Head of Currency Research at Societe Generale, notes that if the Fed drops its reference to keep rates in their current range of 0-0.25% then EUR/USD may resume its move lower towards 1.20 levels.
Key Quotes
“If tomorrow's meeting results in the FOMC Statement dropping the reference to keeping rates in their current 0-0.25% range for a considerable time (as SG expects), EUR/USD should resume its move towards (and through) 1.20. Slightly reduced Euro shorts help, but what really encourages me, is that my really foolish little model of EUR/USD is pretty much back in a state of balance. That helps limit the scope of any upward correction."
“There are three elements to the model, which haven't changed in years. 2-year rate differentials are the biggest driver and after a period of going nowhere they are now moving firmly in the dollar's favour.”
“The VIX matters less these days, largely because it doesn't move much, but volatility is turning higher.”
“Finally, peripheral spreads have been the driver of the model in 2012-2013, tightening as money flowed into European bond and equity markets after Mr Draghi's ‘whatever it takes' speech. Spreads are no longer tightening - in fact, they're edging a bit wider.”
“The net result is not that the model is screaming ‘sell' but it is now saying anything that takes 2-year US swap rates higher, from the current 81bp, should have an impact on EUR/USD. That's a possibility.”
Key Quotes
“If tomorrow's meeting results in the FOMC Statement dropping the reference to keeping rates in their current 0-0.25% range for a considerable time (as SG expects), EUR/USD should resume its move towards (and through) 1.20. Slightly reduced Euro shorts help, but what really encourages me, is that my really foolish little model of EUR/USD is pretty much back in a state of balance. That helps limit the scope of any upward correction."
“There are three elements to the model, which haven't changed in years. 2-year rate differentials are the biggest driver and after a period of going nowhere they are now moving firmly in the dollar's favour.”
“The VIX matters less these days, largely because it doesn't move much, but volatility is turning higher.”
“Finally, peripheral spreads have been the driver of the model in 2012-2013, tightening as money flowed into European bond and equity markets after Mr Draghi's ‘whatever it takes' speech. Spreads are no longer tightening - in fact, they're edging a bit wider.”
“The net result is not that the model is screaming ‘sell' but it is now saying anything that takes 2-year US swap rates higher, from the current 81bp, should have an impact on EUR/USD. That's a possibility.”