EURUSD Jumps Driving Global Risk-On (For Now)

Tyler Durden's picture

As US equity futures open up 15pts or so (stalled at post April NFP and Greek Election open levels from May 6th), it seems EURUSD's initial 130pip spike from Friday's close merely jogged it back up to Friday's late day ramp close in equities (just above Thursday's highs for the major FX cross). Of course it was a see-saw weekend for Spain - they got all the money they wanted (and probably some ponies and unicorns) but only managed a tie against Italy in Euro 2012. Given the short-interest, as we noted in our widely read analysis of #Spailout yesterday (Item 5 here), it is little surprise that we are seeing EURUSD rally. EURUSD is still around 200 pips shy of its swap-spread-implied rate (which seems to be the common level to revert to after 'stress' liquidity hits the EUR and is then 'fixed'). We won't be surprised to see other risk assets levitate on this and while some traders will resist the urge to fade, we suspect that by the time Europe opens things will look a little different as Spanish sovereigns bondholders realize what just happened. The USD is weak against all the majors except JPY as risk-on carry trades hold it practically unch against the USD. Gold has opened modestly higher (in line with USD -0.8% weakness) but Silver is its high beta self +1.9%. Treasury futures are open (cash not yet) but imply a 10-12bps jump in yields for now (which is just normalizing them to ES from Friday's close). WTI just opened 2.3% higher at $86 (so much for that tax-break?) 

ES opened at the May 6th swing lows - reaction post Greek election and the awful April NFP print...


EURUSD and more importantly for risk, EURJPY, had pushed up to where ES closed on Friday - with maybe a 5-10pt premium for momentum, then as ES opened 15pts up EURJPY also popped - but neither seems ready to push higher or lead for now...

 

Each major 'event' has put downward pressure on EURUSD relative to its swap-spread-implied 'fair-value'. Think of this as a 'liquidity' premium. The lower pane shows the crisis in Q3 of last year which then reverted on global CB intervention and then the EUR's undervaluation through the entire LTRO1 and LTRO2 period (which reverted almost perfectly when LTRO 2 ended and the ECB stopped 'printing' for want of a better word). The most recent drop reflects #SPailout fears and the Greek election leaving us still 1 sigma below fair-value here - reflecting, we suspect, the fact that this doesn't change anything - both for those looking for market-based targets for their spec EUR longs, 1.2850 seems reasonable out of the gate, but we would be surprised to see it get there on anything but the squeeze of futures shorts...

 

Treasury Futures (prices) are dumping and imply yield 10-12bps higher than Friday's close.

Which merely normalizes TSYs to where ES is trading...

 

So, in a nutshell,  Gold 1x beta to the USD, Silver 2x, and WTI 3x, EURJPY and ES in line and stalled for now, and ES and TSYs in line (having caught up) and stalled for now.

 

Charts: Bloomberg