Bunds And Euro Tied At The Hip?
Marc Chandler | Jun 03, 2015 11:48AM ET
We have discussed this before, but show this Great Graphic again. The euro is tracking the movement in German bunds. The magnitude of the moves are different but the direction is clear.
The unwinding of long bund positions and, by extension, long European bond positions, is spurring a stronger euro. It is not a yield play. Investors are not buying bunds. They are selling them and unwinding the related short euro hedge position.
One key difference between now and the earlier (late-April/early-May) move is that the stock markets are faring better. However, the relationship is far from stable.
The euro has surpassed the 61.8% retacement of its decline from the middle of May (~$1.1465) to last week's low (~$1.0820). That retracement level is found near $1.1220. A close above there today would encourage momentum and technically-inspired players to look for a move back to last month's high and maybe even a little more to round out what appears to be the fifth leg up. The market may turn a bit cautious ahead of Friday's US employment report.
However, the large force is the sell-off in bunds, especially given practically no chance of a Fed hike this month. ECB's Draghi showed now concern about the volatility and the backing up in yields. He instructed investors to get used to the high-vol environment.
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