How much can EUR/USD decouple from rates? – Deutsche Bank

2017 is setting up to be the first year ever whereby both the EUR is the strongest G10 currency, and the USD is the weakest G10 currency, points out Alan Ruskin, Macro Strategist at Deutsche Bank.

Key Quotes

“While 5y rolling regression suggests EUR/USD should be nearer 1.09, it would have to go through 1.25 before the 'model error' is unprecedented for the last 25 years.”

“Some of the special factors offering the EUR protection include: i) that despite the actual 10y spreads moving against the EUR, 10y spreads 1yr, 2y and 3y forward persistently show expectations of a move in favor of the EUR; ii) The relative US - EUR C/A position is near extremes in favor of the EUR.”

“The start of 2018 is likely to see a market caught between what amounts to solid US rates fundamentals cast against an impressive relative EUR C/A position. What seems clear is that for any significant USD rally, some new impetus is needed, of which the most plausible is an infrastructure spending bill; or, that tax reform does lead to more USD repatriation than expected in Q1/Q2. Judging by 2017, well flagged Fed hikes are not likely to be enough to help the USD, especially once the ECB starts to recognize how far behind the curve they have fallen.”