Relative liquidity supply has lead EUR/USD higher – Nordea Markets

Analysts at Nordea Markets point out that EUR/USD has moved higher, even though classic interest rates spreads have moved in favour of the USD.

Key Quotes

“On one hand the momentum of the EUR supply has slowed, as the ECB has reduced the purchase tempo of assets and on the other hand the USD supply actually increased up until lately, as e.g. the treasury emptied the cash balance at the Fed due to the debt ceiling showdown (thereby flooding the financial system with USDs).”

“The tide is starting to turn on the relative liquidity supply – and the jury is still out on whether this will have positive spot effect on the USD. On one hand a lower stock of USDs should have a positive spot effect, but fewer USDs should also lead the EUR/USD xCcy basis lower – and hence increase the hedging cost of USD bonds seen from a European perspective.”

“So while our base-case of higher EUR/USD into 2019 remains in place, we stick to our tactical view of lower EUR/USD short-term (due to a continued shaky risk sentiment) – but we also think it makes sense to buy a USD lottery ticket in the options space from a risk/reward perspective, as the shrinking USD liquidity is a big unknown.”