19 November, AtoZForex.com, London – Deutsche Bank has identified and shared staggering EURUSD and yield differential correlation, providing arguments and further EURUSD projections.
"Even though the rates market prices in the forward path of the Fed, we find that EURUSD ignores it and prices it only as a function of the yield differential,” argues, believing that:
“We find that a 1% drop in the yield differential leads to a 10 to 15 big figure drop in EURUSD.”
Should the expectations of Fed tightening only increase at the pace which is priced into the forward rate, it would drive EURUSD lower as the market trades the pair as a function of the 2 year sovereign spread, rather than its forward path.
If in addition, the Fed’s dot plot becomes anywhere close to being able to correct the price move in both yields and the USD, it could be theoretically possible for EURUSD to drop 15 to 20 big figures for a 1% decrease in the rate differential.
Deutsche Bank also adds that the currency market trades EURUSD as a proxy for 2 year sovereign rate differentials far more than any other maturity. As such, Deutsche Bank projects:
“Based on the current pricing of the relative forwards, EURUSD is set to slowly drift lower over the next few years.”
Consider reading: All about ECB, Fed and EURUSD
USDJPY & USDCAD
Elswhere, USDJPY tops Deutsche Bank's technical scorecard this week. The pair is highly trending on the upside with a VHF score of 90% and breaking new ground.
“It has smooth price action and is not stretched as per risk reversal measure, but it is quite stretched from RSI measure, although not at extremes," Deutsche Bank's adds.
Following the Yen is USDCAD, highly trending but given a similar level of stretched positions, the pair scores VHF 80%.
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