EUR/USD has finally found some support on the softer US rates story. EUR vs. USD two-year swap differentials have narrowed dramatically – from 113bp last Thursday to 83bp today. Weaker global growth is not good for the pro-cyclical Euro (EUR), but the fact that the 'US exceptionalism' narrative could be coming back to earth with a bump should be EUR/USD supportive, ING’s FX strategist Chris Turner notes.
EUR/USD to trade up towards 1.10
“Were it not for the heavy sell-off in equities, yield differentials would make a case for EUR/USD to be trading well above 1.10 now. We think this is the direction of travel once the risk environment stabilises. In terms of the risk environment, we are keeping our eye on measures of financial risks such as the three-month Ted Spread (Libor over US Treasury bills) and also on the three-month EUR:USD cross-currency basis swap.”
“It is a quiet week for eurozone data. Look out for the August Sentix investor survey today - although that was taken before the recent rout in equity markets. Overall we think EUR/USD should be able to press the 1.0950/80 region and break above 1.10 – especially if the Fed starts to acknowledge that action is required.”
“Elsewhere EUR/CHF continues to be hit. Noticeably the market is not pricing the Swiss policy rate below 0.50%. This means that lower interest rates in the rest of the world are converging on Switzerland. The Swiss National Bank will not like EUR/CHF at these levels and may well be intervening. But it is very hard to fight this current EUR/CHF bear trend.”
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