The following is a post by Marc Chandler, head of Brown Brother Harriman’s Currency Strategy Team. For more of BBH’s currency views, visit the website here.
The Financial Times carried a story in the weekend edition quoting a couple analysts suggesting that the 10-year bond differentials are helping drive the euro lower. In our analysis, we have generally attributed a greater role to interest rate differentials than to external imbalances. Nevertheless, at this juncture, the interest rate differential does not seem like a key driver.
It is true that thus far this year the US 10-year yield has fallen 21 bp and the 10-year German bund yields has fallen 27 bp. Thus the spread has moved 6 bp in the US favor. Incidentally, so has the two year interest rate differential.
We ran some correlations and we do not find anything very significant. (Just a note about methodology, we run the correlations on percentage change because it is a more robust approach).
The euro peaked on Dec 3rd last year. We looked at the correlations in the three months prior to the euro peak and in the three months that the euro has been falling.
Euro Correlations Sept 2-Dec 2 Dec 3-March 1
US-German 2-year spread 16.6% 11.4%
US-German 10-year spread -4.0% 6.5%
Euribor-Eurodollar 2nd contract 21.1% 1.0%
CRB Index 66.6% 57.2%
S&P 500 62.2% 41.9%
Gold 55.1% 74.1%
Oil 2nd contract 64.6% 47.8%
The opinions expressed in this post are those of the author and not necessarily those of Brown Brothers Harriman & Co., its subsidiaries and affiliates (BBH). This information is not intended as financial advice or an offer or recommendation of any financial products and is subject to change without notice. Recipient agrees that it is solely responsible for any trading or investment decisions that it makes after reviewing this information and that BBH bears no responsibility or liability for such decisions or use of this information.