Euro Drivers

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 Drivers Euro Drivers Reviewed by Marc Chandler on March 01, 2010 Rating: 5
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