Euro Shrinking

I pulled out some of my old rate differential charts for a look at how rate spreads on the 2-year German notes were faring vs. US and Japanese counterparts. It is clear that the massive unwinding of the European Central Bank’s expectations is coinciding with the shrinking of the 2-year spreads as the market factors in more relief from ECB President, Jean-Claude Trichet and his board. This process is not necessarily complete, and there is still plenty of room for a further capitulation from the ECB. The German-US 2-year differential is still over 100 basis points (bps) - down from almost 200 bps in July. This differential could easily drop to 50 or below in the near term. The same goes for German vs. Japanese rates, which could have further to fall and already suggest that EUR/JPY should be trading at new lows right now.

EUR/CHF: why is it this high? Rumors were flying about USD/CHF related barriers yesterday around 1.2100, which have obviously fallen now, and USD/CHF has recently moved through its 200-week moving average around 119.70, so the USDCHF focus and recent range trading could be one of the reasons for EUR/CHF's ability to shoot higher and higher recently (and stopping out a likely over-positioned short market) But surely at these levels, the weak hands have been stopped out and we should be focusing on lower levels from here --- we only can wait and see.