Grexit Fear Has Yields Tumbling And EUR Crosses Under Pressure

 | Apr 16, 2015 07:15AM ET

Global yields continue to tumble, mostly on fear or lack of returns and modest growth prospects. It’s beneficial to investors to understand the relationship between various yield spreads to better comprehend some of the recent currency moves. The rule of thumb is that a low rate environment does not make a currency that attractive to investors. One only has to look at the relationship of the EUR to the US/German 10-year spread; it has been correlating well with EUR moves of late. Judged by the moves after March FOMC and non-farm payroll, the market has been selling EUR strength. When the spread tends to widen EUR sellers tend to appear. The problem this week is that the market focus has been on lower U.S yields being backed by weaker data.

Nevertheless, the dollar continues to soar above the EUR in anticipation of the Fed preparing to raise interest rates later this year or early next, in contrast to the ECB. With the ECB committed to buying €1T in bonds until September 2016 – restricted to assets that yield more than the ECB’s deposit rate of -0.2% – its no wonder that there is a feeding frenzy for Euro product all along the curve. German Bunds continue to smash through record high prices or record low yields, using the ECB demand as their backstop.