As expected, the tight correlation between European interbank funding rates and the EURUSD FX rate continues: today, we have seen the first inflection point in both 3M Euribor and 3M EUR Libor, as both have dropped marginally lower, the first from 0.899 to 0.896, the second from 0.83344% to 0.8325%: this is the first decline since July 14. And, not surprisingly, today we see a big pullback in the EURUSD complex. Never too far behind with its own attempt at an explanation, here is Goldman, which after calling for 1.15 in the EURUSD flipflopped yet once again, and is now selling the other side of its 1.35 target to clients.
From Goldman’s Jon Pierce
We have dropped sharply this morning from the 1.3094 to 1.2981 low so far .
The drivers ? :
1. stating the obvious but we have come a long way 1.1876 –>1.3107 , As John Noyce (GS sec) pointed out yesterady we had met his initial target and were confronting significant fib resistance at 1.3125
2. A lot of people ( including some internal analysis) have been looking for a large month end dollar sell fix later today , but some models are suggesting that dollar selling should be primarily against the aud,cad and gbp rather than the eur . It feels like players got long the eur early in anticipation of the fix and have been cutting in the past hour.
3. Euribor rallying and peripheral spreads widening out after several tightening sessions.
4. We have heard talk of notable real money selling in the market today , though only seen relatively small selling but did have a series of sell stops triggered .
5. Risk a touch on the back foot with S+P – 5 .
6. Its Friday ! Always a good day to nail the consensus position and dampen a few weekends .
From here : still tend to like the overall backdrop , but suspect it will be tougher to make fresh upside progress and could be more rangebound. Starting to average into a long from 1.2950 downwards feels like reasonable risk/reward to me .
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