Thoughts from the Trading Trenches April 2015
21 Years ago | March 31, 2015 9/29/23, 12:00 AM
In this issue:
- Why the EURUSD Will Continue to Struggle
- Video: Forex Trading Outlook for April, 2015
Why the EURUSD Will Continue to Struggle
The reasons behind the strong dollar uptrends that have taken it to multi-year highs vs. most currencies are well documented as are the reasons why it paused during March (i.e. large long USD positions, slowing U.S. 1Q growth, partly explained by a harsh winter + low inflation that saw a dovish FOMC statement push out the timing of a Fed rate hike, signs of some green shoots in the Eurozone). The question for me is why the market didn’t correct even further given the pace of the uptrends and the extent of long dollar positioning.
This is not to say a move from EURUSD 1.0457-1.1052 (+5.7%) is not a large one but to overshoot, it would have had to retrace even further (1.1088 = 38.,2% of the 2015 range). So, I tried to put the pieces together and came up with one factor that may have limited the upside. It is also a reason why the EURUSD should continue to struggle. That reason is negative interest rates, which has been overshadowed by ECB QE, a catalyst that drove the currency to 12 year lows.
Negative Interest Rates
Institutional investors, such as investment funds, pension funds and central banks cannot deposit funds at a negative yield. It is against their investment guidelines. For example, when German bunds mature, they are being redeemed and not rolled over at negative yields. This is simply not permitted. Investors would have to go out to nearly 10 years to find a scant positive yield for the safety of investing in bunds (e.g. 10-year bund is currently yielding 0.21%). .
What this suggests is that EUROS have to be sold to either repatriate the funds back home or into another currency. The most favored, especially given current trends, is the USD although other currencies, such as the GBP, AUD and CAD may see some these flows as well. Perhaps this explains why U.S. Treasuries have defied expectations of rising yields as the 10-year is said to be a favored duration for these flows. However, this is just conjecture and not the focus of this article.
The focus is on the impact of negative yields on the EURO that is likely to help cap/slow its upside for the reasons cited above. It is why we hear chatter of selling by central banks, etc. on EURUSD rallies. It almost feels like an invisible hand comes in to cut short EURUSD rallies. The point is this is more than just a speculators market. There are reasons behind some of the flows and one that you need to take into account is the impact of negative interest rates in Europe. This is here to stay as long as there are negative interest rates that make it difficult to reinvest maturing bonds in places like Germany. This is why I say the EURUSD will continue to struggle unless there is a change in the interest rate outlook on the other side of the Atlantic as an easy ECB monetary ;policy (negative interest rates + QE) is set for the foreseeable future.
Jay Meisler, founder
Global Traders Association
Video: Forex Trading Outlook for April, 2015
