A little over a year ago, we noted a curious– and generous– divergence in the relationship between the euro and the Eurozone-U.S. interest rate differential (see here). The large gap between the two historically close variables has narrowed considerably since a year ago, syncing back up this spring:
Has the euro stabilized here? Will it rise again, in line with the recent narrowing spread between interest rates? Another relationship can help provide clues on the potential direction of the exchange rate– the correlation with commercial hedgers’ currency bets:
After reaching new highs (surpassing those of 2012) earlier this year, the propensity of the “smart money” to seek a hedge against further declines in the euro has abated somewhat while remaining elevated relative to historical norms.
Though downward pressure on the EUR/USD exchange rate has eased a bit since April, we can’t yet say for certain that the trend has reversed. We will be watching these charts, in particular, for any clues as conditions in the Eurozone evolve over the coming weeks.
(c) GaveKal Capital
http://blog.gavekalcapital.com
