A brief snippet from MS on the euro, I've tagged it under technical analysis (bolded bit below) but its a chunk of fundamentalism that's the preamble
why FX markets may no longer find yield and interest rate differentials as a reliable FX guide
- The answer lies in the relative size of FX-unhedged flows. About US$10trn of outstanding global bonds have become negative-yielding, suggesting foreign flows into negative-yielding bonds only make sense when the FX hedge turns the negative yield positive.
- Interest rate differentials determine the size of FX-hedged bond flows - with no immediate impact on FX. It is the equity-related flow determining the performance of lower-yielding currencies such as JPY and EUR.
Better China data should allow especially European equity markets to outperform and EURUSD to catch a bid. A break of 1.1280 is required to turn the EURUSD technical picture constructive.
(Overnight note from MS)
