According to George Saravelos, Strategist at Deutsche Bank, something strange has happened to the euro in recent months as almost all traditional drivers that usually “explain” the price action have broken down.
Key Quotes
“One way to show this is to look at rolling 3m correlations between EUR/USD and other variables, and plotting the highest prevailing correlation over time. Among a list of thirty variables including rate differentials, relative equity performance and peripheral spreads the last time correlations were so low was in 2007 and early 2014, both years of exceptionally low volatility.”
“What conclusions can we draw from this? Near-term, it suggests that there may be an underlying flow story that is impervious to other market drivers and is supportive of the euro. We have previously identified unhedged equity inflows as the most likely candidate. These are approaching previous peaks and have typically lagged relative EU-US equity market performance which is why the correlation between equities and the euro is not high. Medium-term, the current “decorrelation” is usually associated with periods of very low volatility and would suggest caution in extrapolating recent euro strength. Traditional drivers tend to re-assert their influence over time and as we argued in the FX Blueprint these mostly show EUR/USD as too expensive. Our view is that EUR/USD will not break out of the top end of its 1.05-1.15 range and if Draghi tomorrow signals ECB discomfort with further appreciation it would make the hurdle for further strength even greater.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD regains traction, recovers above 1.0700
EUR/USD regained its traction and turned positive on the day above 1.0700 in the American session. The US Dollar struggles to preserve its strength after the data from the US showed that the economy grew at a softer pace than expected in Q1.
GBP/USD returns to 1.2500 area in volatile session
GBP/USD reversed its direction and recovered to 1.2500 after falling to the 1.2450 area earlier in the day. Although markets remain risk-averse, the US Dollar struggles to find demand following the disappointing GDP data.
Gold climbs above $2,340 following earlier drop
Gold fell below $2,320 in the early American session as US yields shot higher after the data showed a significant increase in the US GDP price deflator in Q1. With safe-haven flows dominating the markets, however, XAU/USD reversed its direction and rose above $2,340.
XRP extends its decline, crypto experts comment on Ripple stablecoin and benefits for XRP Ledger
Ripple extends decline to $0.52 on Thursday, wipes out weekly gains. Crypto expert asks Ripple CTO how the stablecoin will benefit the XRP Ledger and native token XRP.
After the US close, it’s the Tokyo CPI
After the US close, it’s the Tokyo CPI, a reliable indicator of the national number and then the BoJ policy announcement. Tokyo CPI ex food and energy in Japan was a rise to 2.90% in March from 2.50%.