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19 Aug 2013
Flash: traders targeting pressure points in EUR and GBP –Societe Generale
FXstreet.com (London) - Stephen Gallo, European Head of FX Strategy said “with the normal disclaimers concerning low turnover, thin summer markets and position shakeouts all still applicable, we’d be very surprised if the persistent upward pressure on EUR/USD and GBP/USD didn’t in part reflect the typically antagonistic and rather careless tendency of FX market participants to inflict pressure where the pressure points are the greatest.
Key Quotes:
“In this case, those pressure points relate to the desire of investors to pull the ECB and the BoE out of their “bluffs” and thereby test the Banks’ true abilities to sit on their respective yield curves and physically keep rates anchored – particularly at the front-end. In basis point terms, UK and German 2-year rates actually rose more than their US counterpart this morning in London”.
“If such “testing” by FX markets continues, there is yet another, perfect avenue here for EUR/USD and GBP/USD to depart away from medium-term fundamentals to the upside. Indeed, the larger basis point rise in French, Spanish and Italian yields this morning alongside German yields which fluctuated between intraday rises and intraday declines of a smaller magnitude, suggests that the rise in yields throughout the Euro Area today in part reflects: 1) the natural tendency of global rates to get dragged up with US ones but also 2) the likelihood for sovereign/banking sector feedback loops to intensify if the rise in bond yields becomes too aggressive – hence the possible swapping of exposures between weaker sovereign credits and Germany, and the relatively large rise in non-German yields”.
Key Quotes:
“In this case, those pressure points relate to the desire of investors to pull the ECB and the BoE out of their “bluffs” and thereby test the Banks’ true abilities to sit on their respective yield curves and physically keep rates anchored – particularly at the front-end. In basis point terms, UK and German 2-year rates actually rose more than their US counterpart this morning in London”.
“If such “testing” by FX markets continues, there is yet another, perfect avenue here for EUR/USD and GBP/USD to depart away from medium-term fundamentals to the upside. Indeed, the larger basis point rise in French, Spanish and Italian yields this morning alongside German yields which fluctuated between intraday rises and intraday declines of a smaller magnitude, suggests that the rise in yields throughout the Euro Area today in part reflects: 1) the natural tendency of global rates to get dragged up with US ones but also 2) the likelihood for sovereign/banking sector feedback loops to intensify if the rise in bond yields becomes too aggressive – hence the possible swapping of exposures between weaker sovereign credits and Germany, and the relatively large rise in non-German yields”.