■ There is considerable statistical evidence that the 2 year USD – EUR
spread is set to take over from the 10yr spread as the key driver of
■ Quantitative work is consistent with a very rough rule of thumb that
100bp shift in the 2y spread in favor of the USD is equal to 10 big
figures on EUR/USD.
■ Forward rates point to an 2y spread adjustment in favor of the USD of
120bps in the next 3 years, enough to be consistent with EUR/USD
heading to parity. Greater policy divergence than is priced in by the
forwards is likely.
In recent weeks we have seen a dramatic shift higher in German 10yr real and
nominal yields. In nominal terms 10yr German minus US spreads have
compressed by close to 40bps while the 2 year spread in contrast has hardly
adjusted. One relevant question is what spread adjustments do we need to
push EUR/USD back down to recent lows and then on to parity and beyond?
The question is simple, but the modeling to answer the question is a good deal
more complicated and something of an art form
This is partly because
i) using different sample periods gives sharply different EUR/USD sensitivities to changes in yield spreads; and,
ii) models are likely to be misspecified or suffer
from problems of missing exogenous variables.
The exercise then needs to be taken with a grain of salt, but does offer one way of stress testing our medium term
As a starting point, to get away from stationarity issues especially when the
EUR/USD was trending strongly in the past year,
regressions were based off 5
day rolling sums of the change in yield spreads as the exogenous variable, and,
5 day rolling sum of the percentage change in EUR/USD as the endogenous
variable. (Read Report)
Source : Deutsche Bank Markets Research