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EURGBP, EURCHF and EURNZD configurations as rate forecast stretch

By on December 30, 2021 0

EURGBP, EURCHF and EURNZD talking points

  • The ECB is one of the most accommodating of the major central banks, but it is not the only resolutely accommodating structure
  • EURGBP hits 20-month low after BOE’s recent rate hike, but is it now a widely recognized disparity?
  • The RBNZ is another group already tightening with more restrained techniques, why is the Swiss franc recovering with a deeper negative rate?

As we head into a new market year, a number of major fundamental themes appear to be carrying weight in guiding major financial trends. One of the main issues on my radar is the slow trend in global monetary policy. A number of the world’s largest central banks have already acted or announced their intention to slowly reverse their extremely accommodative stance in the wake of the global recession caused by the pandemic. While groups like the Fed, Bank of England and Bank of Canada have reported rate hikes and rate cuts; one of the biggest players, the European Central Bank (ECB), has maintained its extremely accommodating line. This has added to the weight on the euro in recent months, but the implications here will not move in a straight line. Forecasts will be incorporated and motivation for other fundamental questions will emerge. I am looking at three Euro crosses that look interesting in this fundamental context as well as their unique current technical setups.

Perception of the monetary policy position of the main central banks

Graphic created by John Kicklighter

The euro and the pound have many fundamental similarities to each other given the importance of their respective economies to the health of each. The connection has gone wrong somewhat since Brexit, but the follow-up is still not so divergent between them. On interest rate differentials, the Bank of England (BOE) raised its benchmark interest rate two weeks ago to a benchmark level of 0.25%. This is a clear and hawkish contrast to the ECB’s lingering 0.00 percent stance. That said, the tightening was anticipated – and was not even achieved at the previous policy meeting the previous month. When it comes to short-term government bond yield spreads between Germany and the UK, the spread has been practically flat in recent weeks. This makes the EURGBP’s 8 consecutive day slide to a 20 month low all the more remarkable. While I would like to see a turn on the chart, a steadfast rate outlook could help in a productive reversal.

Graph EURGBP with 200-day SMA and consecutive candle (Daily)

EURGBP, EURCHF and EURNZD configurations as rate forecast stretch

Graphic created on TradingView platform

Unlike the pound sterling, the Swiss franc is backed by the main central bank that is more accommodating to current politics. The Swiss National Bank (SNB) maintained a negative benchmark of -0.75% for six years. This unusual policy is the result of failed efforts to maintain a floor for EURCHF. Since this extremely disruptive fallout, the exchange rate only briefly returned to that level of 1.20 in the second quarter of 2018. believe in the market until November that the SNB was actively acting to keep the exchange rate low. above 1.0500, but the fall from that low reduced the belief they were attempting – or worse, that they were even capable of the feat. This fall in the exchange rate for Switzerland causes serious economic and financial complications. They may find it difficult to reverse the trend definitively, but the market would certainly be very sensitive to a first correction which would lead to speculation about an attempted central bank intervention.

Graph EURCHF with 20 and 200 day SMA differential and Spot-200DMA (Daily)

EURGBP, EURCHF and EURNZD configurations as rate forecast stretch

Graphic created on TradingView platform

The third cross euro that interests me from a monetary and technical standpoint is the EURNZD. Here, the fundamental disparity is not hard to miss as New Zealand rates are much more robust than European yields (below I am using German). Having said that, there is no straight line trend in the exchange rate, as if the carry trade is the only driver incentive. Here, too, interest rates and interest rate forecasts are well priced, with the RBNZ hikes generating remarkably weak traction here. A recent pullback in the New Zealand 10-year rate relative to its German counterpart continues to drift against the former, but rate forecasts should not turn the tide as significantly. Where I see bullish potential for the Euro in the first two pairs, this one looks technically ready for the opposite with a breakout below 1.6500, a viable index if that happens. It would also be more of a “range” move than a full reversal, which would make strategy setups more convenient.

Graph EURNZD overlaid with a German-New Zealand 10-year yield and a 60-day correlation (Daily)

EURGBP, EURCHF and EURNZD configurations as rate forecast stretch

Graphic created on TradingView platform

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