FX Drivers - the EUR|USD
Macro Drivers
Insights | FX drivers
CONCEPT
The EUR/USD exchange rate is a measure of relative economic gravity between the US and the Eurozone, indicating which economy scores more points to attract capital. The main drivers of this gravitational pull are: (1) Interest Rate divergence (central bank policy bias), (2) Yield differential (long-term capital flows), and (3) PMI Differential (the growth momentum gap).
CURRENT READINGS
- Interest Rates divergence (1.70%): US spot rates are marginally higher than the ones in Europe, a factor that should be mildly supportive of the USD
- Yield differentials (1.36%): US 10yr Treasury yields are higher than the German Bund ones, a factor that should support the USD.
- PMI growth differentials (2.90%): US prospective growth is expected to be much faster than European growth in the upcoming months, a factor that should be clearly supportive of the USD.
MARKET IMPLICATIONS
- The gravitational pull from the observed key macro drivers should be supporting the USD. The reality is that short-term correlations show that none of these key drivers have been influencing the exchange rate recently. The EURUSD seems to have been influenced instead by external political and geopolitcal events.
Influence | Stocks & FX
Insights | EQTY correlations
CONCEPT
Monetary policy, capital flows and investor sentiment influence the interaction between stocks and the EURUSD, which is dynamic and reciprocal: (1) changes in sentiment and growth outlook drive stocks prices, pushing investors to buy/sell currencies to take positon; (2) changes in monetary policy drive currencies, which then impact equity flows and prices.
CURRENT READINGS
- Over the observed period on the chart, the USD turned stronger vs EUR and the Stoxx 600 index has moved slightly up. Their 3-Month correlation is 0.80.
MARKET IMPLICATIONS
- The situation in the observed period - the daily correlation contradicts the point-to-point market performance, indicating a recent shift in the relationship or high intra-period volatility
The general mechanics - fundamental analysis indicates that a weaker EUR would support EU earnings and attract international capital in European stocks, while a stronger EUR would slow-down European export-heavy stock prices instead. From a different angle, momentum analysis explains instead that positive sentiment towards the EU - whatever the reason - would drive flows into European stocks pushing up the EUR as a consequence.