1. The Greece Debt crisis induced an agGressive 3000pip+ sell-off in just 6m (-22%). As the crisis "resolved" EUR$ however failed to retrace any of its losses.
- Instead EUR$ looked to adopt these new crisis lows as what has become a long-run trading range - the likely explanation would be that future FED/ ECB monpol divergence was priced "early", hence we have maintained the crissi lows.
2. Going forward this explains why EUR$ hasnt made more downside declines from 1.10 despite added Fed tightening and ECB easing - and could imply that we will remain tightly rangebound here (1.05-1.15) as future ECB/ FED monpol divergence is likely to taper off as ECB easing comes to an end, which will potentially off-set the inevitable added FED hikes.
3. Though my bias would still be lower from EUR$ as Fed hikes, and the steepness of their hike cycle is likely to become more aggressive, whereas the ECB easing fade off-set is arguably less of a factor than hikes are a factor.
- HOWEVER, once again it is uncertain how much forward ECB/ FED monpol pricing has been done already in this 3000pip move lower, it could be that until fed funds reaches 2% (for example) that the divergence isnt enough to justify more than the 3000pip move lower that we have seen. It may take a much more aggressive steepening in monpol divergence between ECB/ FED (than what has been generally expected) to drive EUR$ to parity, the extent to which I do not know..
- Also the ECBs easing cycle, and whether it comes to the end (or is extended further) may possibly play a big role on the degree that this 1.10 equilibrium holds. ECB adding another 6m out to march 2017 and 240bn would only weigh in the bears favour, though once again the effect may be muted somewhat due to the above.
Any questions or other ideas please comment below!