EUR/USD: Signal From Rate Spread Out Of Sync With Spot; Caution Here – Credit Agricole

Credit Agricole CIB FX Strategy Research notes that the recent EUR/USD rally stands in sharp contrast with the muted widening of the EUR-USD 2Y rate spread.

In addition,  CACIB notes that EUR/USD rebound is running ahead of the gradual tightening in the OAT-Bund 10Y yield spreadthat has been evident since the French presidential elections.  

On the flows front, CACIB notes that investors have built considerable EUR-longs in anticipation of portfolio inflows into Eurozone stock markets and unwinding of EUR-funded carry trades as the ECB moves ever closer to the QE taper.

“We doubt that these inflows can boost EUR, however, so long as they are hedged,” CACIB argues.

On the USD front, CACIB also notes that USD has sold off in excess of the recent correction lower in Fed rate hike expectations.

“We expect the US growth outlook to improve, political risks to subside and the FOMC to maintain its outlook for further monetary policy tightening, helping USD to recover,” CACIB adds. 

On the valuation front, CACIB estimats of the short-term fair value for EUR/USD suggests that the pair should be trading well below 1.08 at present.

All in all, CACIB advises caution on the near-term outlook for EUR/USD.  

EUR/USD is trading circa 1.1183 as of writing. 

Source: Credit Agricole CIB Research

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