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27 Mar 2015
EUR/USD reacting to 2yr euro rates, might see parity if Fed hikes twice in 2015 – SG
FXStreet (Barcelona) - Kit Juckes, FIC Strategist at Societe Generale, explains the relationship between EUR/USD and 2-yr euro rates, and further comments that for the pair to see parity the Fed might need to hike rates twice this year.
Key Quotes
“..to see EUR/USD trading back towards parity, we will need to see fresh downward pressure on euro rates.”
“I believe that it was the rethink about ECB policy and the ECB’s embrace of QE that ‘explained’ the euro’s fall and that caused it to fall so much faster than expected (or at least, than I expected).”
“As a huge bearish consensus about EUR/USD built up, an 8bp fall in 2yr euro rates (and a 13bp move in the euro/US 2-year rate differential) took EUR/USD down from 1.21 to 1.05. Correlations over the last decade would suggest that a rate move of that magnitude might push EUR/USD a couple of figures lower, to 1.19.”
“Now that the euro rate move is over, the FOMC meeting is behind us and the possibility of the US economy growing more slowly in Q1 than the eurozone is being openly discussed, positions can be reduced and the market can settle down. It’s very likely that the bigger move in 2-year rates in the months ahead will be in the US (with euro rates stuck in a tight range at a low level).”
“US rates will be dollar-supportive subject to one rather familiar caveat – that the current soft patch is just that and will be followed by a return to growth rates strong enough to get the rate cycle, finally, up and running, even if it is bound to be tentative.”
“If the Fed raises rates this summer, EUR/USD will probably fall a bit. If it raises rates twice this year, we’ll probably see EUR/USD go below the pre-FOMC low and close to parity.”
“And away from EUR/USD, the end of March may also be a bit of a watershed for USD/JPY, AUD/USD and USD/CAD. All are at levels where USD longs appeal for April.”
Key Quotes
“..to see EUR/USD trading back towards parity, we will need to see fresh downward pressure on euro rates.”
“I believe that it was the rethink about ECB policy and the ECB’s embrace of QE that ‘explained’ the euro’s fall and that caused it to fall so much faster than expected (or at least, than I expected).”
“As a huge bearish consensus about EUR/USD built up, an 8bp fall in 2yr euro rates (and a 13bp move in the euro/US 2-year rate differential) took EUR/USD down from 1.21 to 1.05. Correlations over the last decade would suggest that a rate move of that magnitude might push EUR/USD a couple of figures lower, to 1.19.”
“Now that the euro rate move is over, the FOMC meeting is behind us and the possibility of the US economy growing more slowly in Q1 than the eurozone is being openly discussed, positions can be reduced and the market can settle down. It’s very likely that the bigger move in 2-year rates in the months ahead will be in the US (with euro rates stuck in a tight range at a low level).”
“US rates will be dollar-supportive subject to one rather familiar caveat – that the current soft patch is just that and will be followed by a return to growth rates strong enough to get the rate cycle, finally, up and running, even if it is bound to be tentative.”
“If the Fed raises rates this summer, EUR/USD will probably fall a bit. If it raises rates twice this year, we’ll probably see EUR/USD go below the pre-FOMC low and close to parity.”
“And away from EUR/USD, the end of March may also be a bit of a watershed for USD/JPY, AUD/USD and USD/CAD. All are at levels where USD longs appeal for April.”