29 May 2014
Euro short a 'no brainer' for long term investors - SocGen
FXStreet (Bali) - If you’re a long-term investor, now is the time to be short Euros, notes Kit Juckes, Head of FX Strategy at Societe Generale.
Key Quotes
"The driving force of the currency’s appreciation since July 2012 was a huge tightening in peripheral bond spreads over the same period (450bp for 10yr Spain vs Germany, 23 ½% for Greek 10yrs)."
"That move may not be completely over, but it is its final stage. The Spanish spread is at 148bp now, and will surely be within 50bp of this level."
"My ‘baby model’ suggests a 100bp move in the 3yr spread moves EUR/USD by 3 figures. From 90bp now, there’s enough room left to get back to EUR/USD 1.40 but that’s it. The same model reckons a 1% move in the 2yr EU/US rate spread moves fair value by 12 figures."
"The current gap is 13bp. 2yr Euro rates are at 36bp, which makes a big move driven by falling Euro rates hard to see, and that is why I have remained tactically keen to go short Euro as late as possible (and as close to the end of the tapering cycle a possible)."
"But if you can cope with the risk of a short-covering rally back up within this year’s EUR/USD 1.35-1.40 range, shorts anywhere in that range, of longs in USD/CHF, look very attractive over the long term."
Key Quotes
"The driving force of the currency’s appreciation since July 2012 was a huge tightening in peripheral bond spreads over the same period (450bp for 10yr Spain vs Germany, 23 ½% for Greek 10yrs)."
"That move may not be completely over, but it is its final stage. The Spanish spread is at 148bp now, and will surely be within 50bp of this level."
"My ‘baby model’ suggests a 100bp move in the 3yr spread moves EUR/USD by 3 figures. From 90bp now, there’s enough room left to get back to EUR/USD 1.40 but that’s it. The same model reckons a 1% move in the 2yr EU/US rate spread moves fair value by 12 figures."
"The current gap is 13bp. 2yr Euro rates are at 36bp, which makes a big move driven by falling Euro rates hard to see, and that is why I have remained tactically keen to go short Euro as late as possible (and as close to the end of the tapering cycle a possible)."
"But if you can cope with the risk of a short-covering rally back up within this year’s EUR/USD 1.35-1.40 range, shorts anywhere in that range, of longs in USD/CHF, look very attractive over the long term."