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13 Aug 2013
Flash: EUR/USD to parity (in 5 years time) – Societe Generale
FXstreet.com (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale has addressed the question of FX market over reliance on short term rate differentials.
Key Quotes
“(In an) attempt at explaining why EUR/USD has been so resilient in the face of higher US bond yields. I’ve plotted EUR/USD against a very simple two factor model using 3yr Spain/German y spreads and 2yr US/European rate differentials. I have also plotted the 2yr rate spread, 5yrs forwards, but that doesn’t correlate with FX moves at all.“
“In short, the Euro is being supported by the fact that while forward rates are pricing a widening US/European rate spread, current rate differentials have moved much less and been offset by the strength of peripheral Euro Zone bonds.”
“The FX market can’t really be that oblivious to longer-term expectations but if I take this over-reliance on shorter term rate differentials at face value. I can build a grid of “model-consistent” levels for EUR/USD, subject to where rate spread and yield spreads are.”
“The 5yr forward rate spread is 125bp and the 3yr Spain/German spread is heading towards 200bp. On which basis, in 5 years’ time, EUR/USD should be at 1.0. All I need are vast reserves of patience!”
Key Quotes
“(In an) attempt at explaining why EUR/USD has been so resilient in the face of higher US bond yields. I’ve plotted EUR/USD against a very simple two factor model using 3yr Spain/German y spreads and 2yr US/European rate differentials. I have also plotted the 2yr rate spread, 5yrs forwards, but that doesn’t correlate with FX moves at all.“
“In short, the Euro is being supported by the fact that while forward rates are pricing a widening US/European rate spread, current rate differentials have moved much less and been offset by the strength of peripheral Euro Zone bonds.”
“The FX market can’t really be that oblivious to longer-term expectations but if I take this over-reliance on shorter term rate differentials at face value. I can build a grid of “model-consistent” levels for EUR/USD, subject to where rate spread and yield spreads are.”
“The 5yr forward rate spread is 125bp and the 3yr Spain/German spread is heading towards 200bp. On which basis, in 5 years’ time, EUR/USD should be at 1.0. All I need are vast reserves of patience!”