Via Goldman Sachs on the euro, firstly a look back at last week:
- saw a small but broad pullback in the Dollar, despite some weakness in equity markets and higher US real yields—two ingredients that would generally be associated with a stronger greenback. While difficult to be sure, we suspect the moves reflect renewed Dollar short positioning as we approach expected vaccine news and the US election.
On the EU auction:
- A number of investors pointed to the strong first EU auction under the SURE scheme as a reason for the Euro's latest gains. The auction saw 37% of the 10y paper allocated to central banks and official institutions, raising the prospect of reserve managers beginning to rotate into the Euro. While we do expect reserve diversification to support the Euro over time, we caution against over-interpreting the moves this week.
- there are a number of reasons to still be cautious on this particular driver.
- First, given the duration of debt being issued we would not be surprised if a portion of the official sector purchases came from sovereign wealth funds rather than reserve managers, which tend to prefer shorter-maturity paper. Second, the geographical distribution is likely obscured by custodian locations (often Belgium) and fund domiciles (often Luxembourg), making it hard to observe the true cross-border demand. Third, this was the first, small auction of what is set to become a substantial source of new issuance over time—we will need to continue monitoring official sector demand at future auctions.
And, seemingly reluctantly GS conclude:
- Nonetheless, we continue to recommend EUR longs, but as a (nearly) risk-neutral expression of broad Dollar weakness, not because of cross-border demand for European bonds.
