EUR/USD: Time to question the Quadvergence

Transcription

1 EUR/USD: Time to question the Quadvergence - EUR/USD has been supported by growth, inflation, political and policy/yield convergence - We think it s time to question the first two of these factors - EUR/USD unlikely to keeping marching north in the near term Martin Enlund 23 January 2018

2 The Transatlantic Quadvergence 1. Inflation convergence 2. Growth convergence 3. Political convergence 4. Policy/Yield convergence 2

3 EUR/USD: inflation rates have converged The rise in EUR/USD in 2017 was underpinned by relative core inflation developments which impacted central bank and market psychology. But past dollar weakness and a strong labour market should help underpin US inflation vs EA inflation, potentially widening the inflation spread to the dollar s advantage in coming quarters. 3

4 EUR/USD: but EA core inflation is likely to remain depressed A stronger EUR and weak but past dollar weakness and a strong labour market should help underpin US inflation vs EA inflation, potentially widening the inflation spread to the dollar s advantage in coming quarters. 4

5 EUR/USD: while US inflation should pick up A stronger EUR and weak but past dollar weakness and a strong labour market should help underpin US inflation vs EA inflation, potentially widening the inflation spread to the dollar s advantage in coming quarters. 5

6 The Transatlantic Quadvergence 1. Inflation convergence 2. Growth convergence 3. Political convergence 4. Policy/Yield convergence 6

7 EUR/USD: EMU growth expectations very lofty The G10 surprise index almost always drops over the next 2 months when it s this high. And that usually means bond performance improves vs equities. Moreover, weighing positioning and US surprise index together suggests the market should be much more sensitive to weaker data than to positive data. The same conclusion holds on JPM s positioning data: investors are short 10y Treasuries, and massively net short USTs on aggregate. 7

8 EUR/USD: weaker USD, stronger EUR suggests one should favour the US A stronger EUR and weak But past dollar weakness and a strong labour market should help underpin US inflation vs EA inflation, potentially widening the inflation spread to the dollar s advantage in coming quarters. 8

9 EUR/USD: maybe this is what equities have sniffed out? A stronger EUR and weak But past dollar weakness and a strong labour market should help underpin US inflation vs EA inflation, potentially widening the inflation spread to the dollar s advantage in coming quarters. 9

10 The Transatlantic Quadvergence 1. Inflation convergence 2. Growth convergence 3. Political convergence 4. Policy/Yield convergence 10

11 EUR/USD: Italian election might prompt investors to avoid Italy 11

12 EUR/USD: What about US mid-terms? The Republicans might bounce-back, supporting the USD. 12

13 The Transatlantic Quadvergence 1. Inflation convergence 2. Growth convergence 3. Political convergence 4. Policy/yield convergence 13

14 EUR/USD: market convinced of an eventual ECB QE exit and rate hikes 14

15 The Transatlantic Quadvergence 1. Inflation convergence US inflation to pick-up while EA risks remain on the downside (vs market expectations). 2. Growth convergence The first two factors are likely to be questioned over the next three to six months US ISM to outperform EA PMI due to e.g. delayed FX effects. Trump tax reform boosts the US, but not the EA. 3. Political convergence USD has probably been sold as Republican control of the House less likely, but this could change. As could European politics. 4. Policy/Yield convergence Market participants still likely to bet that the longterm trade is German-US yield convergence unless the EA faces a big shock But big disappointments or surprises needed to truly question the long-term policy trade 15

16 Thank you! Nordea Markets is the commercial name for Nordea s international capital markets operation. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. Martin Enlund, Chief FX Strategist martin.enlund@nordea.com The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets. In relation to transactions in financial instruments as well as in relation to financial services you may incur costs (including taxes). The tax treatment of such transactions is dependent on your individual circumstances and may change in the future. If you would like to obtain advice, or would like to know more about applicable tax legislation, we recommend that you contact a tax advisor or an accountant.