Yield spreads continue to tumble aggressively against EUR – Westpac

Yield spreads continue to tumble aggressively against EUR, the 2yr BundTsy spread hitting an eye-watering -277bp, the widest in 20 years, but EUR/USD however long ago ditched any pretence to tracking yields, according to Richard Franulovich, Research Analyst at Westpac.

Key Quotes

“Key gauges that have proven to be a more reliable barometer for the EUR’s persistent firm tone include robust Eurozone growth conditions, expectations for ECB policy normalisation and ECB comfort levels with EUR strength. Unless growth expectations suddenly cool or the ECB pushes back on expectations for the gradual withdrawal of accommodation and/or sounds the alarm on EUR strength more aggressively than has been the case the currency will continue to trade on the strong side of fair value.”

“Key risk near term: populist/anti EU backlash in Italian elections and a “no” vote from SPD party members on whether to join Merkel in a coalition (both 4th Mar).”