German-US Spread Breakout to 4-mth High

While bond yields rally across the board, Germany's 10-year bund yields lead the pack in the G10 world, breaking 0.95% and narrowing the gap with their US counterpart to the smallest level in four months.  As the extended rally in German-US spread moves in tandem with EURUSD nearing the 1.1470 resistance, the relation is likely to be prolonged by further upgrades in German growth by the Bundesbank (tomorrow), faster rise in Eurozone inflation relative to US and a high bar of expectations in Friday's US jobs report (NFP, UnempRate, AHE). All this justifies our decision to go long EURAUD and EURCAD in the Premium trades of the past 6 days. EURAUD entry at 1.4290 hit its 1.4560 target, while EURCAD entry at 1.3820 remains in progress w/ +270 pips so far.

USDX Index illustrating a clear case of Lower Highs (March 13, April 13 & May 27). Today, USDX closed below the 50 and 10 DMA (on the same day)

Tuesday's EURUSD 2.0% rise was the biggest percentage gain since March 18, but the main difference is that March 18 did not witness a rally in German 10-year bund yields (+30%) as back then. In fact, bund yields fell on March 18. The next biggest percentage daily drop in EURUSD before March 18 was on October 27, 2011, when ECB/EU/ IMF were ironing an agreement for Italy and Greece.

This week's bund yield rally erased TWELVE days of losses, suggesting the current s EURUSD gain is as much as it was a case of Eurozone data optimism (inflation differentials narrowing relative to the US) as it was a case of USD pessimism.

The USD side of things was highlighted by: i) US factory orders falling in 8 out of the last 12 months; ii) surprisingly dovish comments from Fed board governor Brainard on USD impact and soft US growth; iii) confluence of crucial factors (AUD/USD breaking out of its 2 week channel; iv) USD/JPY dropping more than 100 pips from psychological 125; v) GBPUSD bottoming at 50-10 DMA confluence.

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