EUR/USD: 2 Charts Send Warning
In a note to clients today, CitiFX highlights two charts that are causing concern on their EUR/USD view:
“When both equities and swaps point to a higher EUR/USD, we pay attention – regardless of where we think EUR/USD is headed from a macro perspective,” Citi argues.
“Fundamentally, our year-end view remains 1.05…Leaving the Q4 view aside, the charts below are pretty convincing – and present a strong challenge to the macro framework,” Citi adds.
DAX/SPX/EUR/USD (L), 10-Yr. Spreads/EUR/USD
This, according to Citi, raises two questions surface immediately for us: “(1) Why isn’t EUR/USD higher already (i.e. the correlations have broken down between FX, swaps & equities) and (2) What’s the potential here for yet another squeeze (i.e. correlations returning)?,” Citi clarifies.
In terms why these correlation have broken, Citi thinks that the ECB is so far the best explanation.
Can the sequeeze return? “The squeeze comes if either seem inevitable – (1) the market stops believing in a policy push-back, or fear of the central bank policy drops away, or (2) systemic shock trumps all & another economic/financial shock as surprising as China over August,” Citi answers.
“Looking forward Draghi’s speech on Thursday in DC would be the most immediate event risk that decides direction. His balance (hawkish/dovish/neutral) is key for EUR/USD above 1.15 or below 1.10. Until then, we are cautious that squeezes under low liquidity can come more quickly than anticipated – particularly under EM risk-off,” Citi argues.