The euro is still the story in FX land. It’s now just a matter of: “is there a reason to not be bullish today?” The answer on Monday was “no,” and so… 1.20 here we fucking come.
That’s from yesterday and not only was there no reason to turn bearish on Tuesday, there was instead another reason to be bullish, as EUR/USD ran upside stops through 1.20 in the overnight and now here we sit:
Importantly, the euro’s haven status is getting cemented here. As Bloomberg notes, “the common currency was under pressure early on in response to news that North Korea had fired a ballistic missile over Japan [but] an initial reaction that saw the euro slipping against yen and the Swiss franc was steadily pared.”
One thing that’s worth keeping an eye on: these broad-based risk-off moves will invariably put downward pressure on bund yields and indeed as the sentiment worsened in the overnight, German 30y yields dropped 6bps and bund futures rallied back to post-Sintra levels, but when you think about the rate diffs pillar for EURUSD, don’t forget that Treasury yields have to contend with gridlock in Washington whereas Italy and the German elections notwithstanding, Europe has cleared its biggest political hurdle (the French elections).
So the point is, during risk-off episodes, one could easily argue that there will be more downward pressure on U.S. yields than on bund yields which sets the stage for a further narrowing of the UST-bund spread and if that happens, well then it will give EURUSD another excuse to keep on rallying.
Meanwhile, the combination of a euro that’s getting some safe haven traction as the risk-off move accelerates is effectively creating a Topix-Nikkei-yen-type relationship for European equities – but unlike Japanese benchmarks, the EuroStoxx doesn’t benefit from Draghi buying ETFs.
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