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Euro Drivers

Euro Drivers, swap, rate, euro, dollar, exchange, grab, Currency Analysis, fx trader, forex

There is one variable that explains the euro movement better than any other single variable we have found.  The US-Germany two-year interest rate differential continues to be highly correlated with the euro-dollar exchange rate.

Specifically, the percent change in the differential (or swap rate) and the percent change in the euro have a 0.56 correlation over the past 60 days.  It is roughly the same over the past 30 sessions.  Both are at near multi-year extremes.    On a purely directional basis, the correlation is even greater (~0.66).

It makes sense then to look at the drivers of the interest rate differential to back into a view of the euro.  The multiyear high was set shortly before the Fed hiked rates last month just shy of 223 bp.  By the start of this week, it had fallen to 192 bp, almost a three-month low.  It is now near 198 bp.

Let's look at the two components separately. The first chart (Bloomberg) shows the German two-year yield.  The yield rose 20 bp since April 18.    There seemed like a couple of drivers.  First, half of the increase appears to be the unwinding of safe haven demand after the first round of the French presidential contest.

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