EURIBOR, Euro & USD Index

by Ashraf Laidi
Aug 4, 2010 0:45 | 15 Comments

Many have expressed scepticism with strength of the euro at a time when EURIBOR and EUR-Libor rates remained on the rise. EUR 3-month LIBOR stands at 12-month high of 0.83%, up 46% from its March lows. Yet unlike in April-May when rising Eurozone rates resulted from plummeting inter-bank confidence and falling liquidity in the system, the recent strengthening in Eurzone interbank rates has been partly boosted by improved macroeconomic/bank earnings figures, as well as a stabilizing currency.

Rising EURIBOR and EUR 3-month LIBOR are primarily negative for the euro at times when eroding interbank confidence leads to a shortage of US dollars in the global monetary system, to the extent of boosting USD-denominated LIBOR. But thats not been the case over the past 6 weeks. While EUR 3-month libor has risen by more than 20-bps since the peak of the sovereign crisis in early June, USD 3-month LIBOR fell by nearly 15-bps during the same period. Weak US data, FOMC economic downgrades and broadening Fed dovishness have accelerated the decline in USD-libor. Consequently, the chart below shows the EUR-USD 3-month libor spread (EUR minus USD as indicated by red graph) to have risen to its highest level since January, closely followed by a rising euro.

EURIBOR, Euro & USD Index - EURLIBORAUG3 (Chart 1)

Just Like in October 2009

The steepness of the EUR-USD libor spread is instrumental in boosting EURUSD, in a manner that is highly similar to Q3-Q4 2009 (left circle) when USD-libor fell below its Japanese counterpart for the first time. That was the time when markets allowed for the possibility of fresh QE in the US. As is the case today, the Federal Reserve was the only major central bank most likely to add on to its existing asset purchases, while the BoE had ended its QE program and the ECB standing pat. The result was a broad decline in the US dollar, coupled with rising equities and soaring energy and metal prices.

A 200-day MA unlike any other

The US dollars decline made the headline today when the USD index hit 80.59, falling below its 200-day moving average for the first time since late January. The importance of such a decline will only be highlighted once the break of the 200-day MA lasts into mid-month. But theres something notable about todays development. It is the first time in the life of the euro that the USD index breaks below its 200-day MA, without EURUSD breaking above its own 200-day MA. The chart below shows EURUSD stands at $1.3230, which is about 3 cents below its 200-day MA. Considering that EUR occupies 57% of the 6-currency basket of the USD index, it can be deduced that the bulk of USDX losses have occurred against the other currencies in the index (JPY, GBP, CHF, CAD and SEK). Indeed, each of these currencies has risen above its 200-day MA against the USD dollar. With the euro lagging behind, this suggests the EURUSD rally is largely the result of USD weakness, which could be explained by lingering sovereign dent worries. But this may also serve a warning signal for the next leg of broad USD weakness once EURUSD breaks above its 200-day MA.

EURIBOR, Euro & USD Index - 200Daymas (Chart 2)

EURUSD has extended its rally across the board after closing above the important $1.3130s resistance. Despite a modest Tuesday pullback in US equities; risk currencies face little resistance in accumulating further ground against USD. EURUSD faces $1.3270 as the next technical target, which is the support from mid March to early April. Contrasting economic data between the US and Eurozone as well as the earnings performances on the banking sector continues to shore up the euro on the premise of broadening stabilization of inter-bank concernsand to a lesser extentrobust recovery in Germany. A little bit more help from Fed rhetoric will be crucial in extending EURUSD to the all-important 200-day MA (now at $1.3575)

EURIBOR, Euro & USD Index - Eurusdmonthlyaug3 (Chart 3)

.For more frequent FX & Commodity calls & analysis, follow me on Twitter Twitter.com/alaidi

Comments (Showing latest 10 of 15) View All Comments
said
mulhouse, France
Posts: 2822
9 years ago
Nov 19, 2010 16:38
we will have this target for next week on Tnotes
said
mulhouse, France
Posts: 2822
9 years ago
Nov 19, 2010 14:32
us 10 years treasury cboe coming at 2.95/7
said
mulhouse, France
Posts: 2822
9 years ago
Nov 18, 2010 10:50
US government 30 years heading to 4.30 4.32/33 by today tomorrow
said
mulhouse, France
Posts: 2822
9 years ago
Nov 8, 2010 10:17
now it is all about a grenadier that boarded if i dont mistake in nicae.
jw
toronto, Canada
Posted Anonymously
9 years ago
Nov 3, 2010 22:54
Hello Ashraf,

I was just wondering on if you think the Russian Ruble is over/under valued against the USD right now. With the Ruble paying interest, where do you see the long term value of this exchange rate?

Jeff
jw
toronto, Canada
Posted Anonymously
9 years ago
Oct 29, 2010 20:41
Hello Ashraf,

I was just wondering on if you think the Russian Ruble is over/under valued against the USD right now. With the Ruble paying interest, where do you see the long term value of this exchange rate?

Jeff
bojan
Arizona, United States
Posts: 111
9 years ago
Sep 9, 2010 13:57
Abdelrahman Hussien
Alexandria, Egypt
Posted Anonymously
9 years ago
Aug 10, 2010 0:33
Excellent analysis Mr. Ashraf, Rate differentials is always been a reliable and valid tool for rate

analysis. I want to ask If the USD/JPY is an indicator of USd weakness against Euro? the Euro is

appreciating because the US dollar is weak. IF Eur Is rising because of high risk appetite and shifting of

cheap money to high yielders, then USD/JPY should appreciate (move in the same direction at least). is that analysis valid? since USD\JPY is downside pressured we assume a weak Dollar Fundamentally which do not mean a EURO relative strength (as in economic activity)

Ashraf Laidi
London, UK
Posts: 0
9 years ago
Aug 4, 2010 21:58
fx, carlco, agreed. lets be careful here. first we need to see USDX CLOSE the week BELOW its 200DAY MA then need EURUSD to follow thru above 1.34 and to 1.3570s.


Ashraf
jain
India
Posted Anonymously
9 years ago
Aug 4, 2010 18:36
I think euro has turned 1.32 breakdown is around 1.315 odd 0.95 yea possible by next year .Lets see how it goes