We suspect that the ECB is targeting a reversal of the EUR rally that started after the EURUSD hit a multiyear low of 1.2043 in June '12 - Citi
Using a simple 2y rate model, we can forecast a 1.07 EURUSD for 2 years time, using the spread between 2y2y fwd starting swaps. But like I said, its not going to happen as cleanly as that, but the magnitude of downside isn't *that* ridiculous.
However, I care much more about where the EUR is going in the next few months, not years. So lets look at that.
|CESI spread vs 70-day change in EURUSD|
|EUR vs model FV|
I still see Sovereign QE as a likely inevitability from the ECB, but not for a while, so until year end I expect little from them. From the fed, the prior FOMC was quite interesting. A hawkish shift in median dots, yet Yellen clearly stated that the Futures market aren't out of line with the dots. Given that they are massively out, we can only draw from that the location of Yellen's projections in the 2016 and 2017 periods (I circled them)
|2yr futures net positioning (CFTC)|
Lastly on the EURUSD, looking at DXY bigger picture.
On to a little look at some precious metals, we've seen quite a sharp move higher in 5 year real rates. Many expected 0 to at least slow us down, yet we're already 12bps past that now. The outlook for higher real rates also makes sense somewhat, so while we may pullback, it might be shallow.
The relationship with Gold and Silver is very well documented, and well known, and we can see so far this year, the two track each other nicely.
|US 5y real rate (inverted) vs Gold|
To me, being long XAU vol here seems to make sense. If we break lower than 1200 we're certainly going to trigger a lot of stops on our way down to 1050, if we reverse, investors that have chased this lower against the 1200 level could quickly cover. Hence a 3 month straddle seems pretty attractive to me.
Otherwise, last post for a while (I assume). Moving into uni next week so quiet from me.