DXY eased last night:
AUD held on:
No help from North Asia:
Metals melt continues:
Miners too:
EM holds on:
Junk firmed:
Yields firmed:
Stocks to the moon:
Europe continues to worry markets. Credit Agricole (EPA:CAGR):
While the French political drama remains a key EUR-driver at present, many investors have noticed that the EUR/USD drop so far pales in comparison to the aggressive widening of the 10Y OAT-Bund yield spread for example.
In particular, while the former remains within its recent trading range, the latter has reached its widest level since the French presidential election in 2017, when EUR/USD was flirting with 1.05.
We further note that if we are to use the 10Y OAT-Bund yield spread instead of our gauge of peripheral yield spread to Bunds (using BTP and Bono yields among others) in our short-term model for EUR/USD, the fair value plunges to 1.049 from 1.0687.
We also note that the model fit is much better when we use peripheral yield spread to Bunds than OAT-Bund yield spread.
Our results suggest that EUR/USD is more closely following the price action in peripheral EGB markets than the OAT market in isolation.
That said, there are several reasons to expect that the risks for the FX pair and its fair value could be to the downside from here:
(1) contagion from the OAT market is already starting to spread to other EGB markets like the BTP market
(2)Eurozone stocks have taken a hit as well and could continue to erode the investment appeal of the EUR; and
(3) the bond market & equity sell-off would trigger tightening of Eurozone financial conditions and could force the ECB to turn more dovish in a blow to the EUR’ rate appeal.
On the day, focus would be on speeches by the ECB’s Christine Lagarde, Philip Lane and Luis de Guindos.
The EUR could remain vulnerable to any further sell-off in the French bond and stock markets or any evidence of growing contagion to the rest of the Eurozone.
That all makes perfect sense.
While EUR pressures remain, AUD risks tilt to the downside.