Inside the Currency Market: EUR/USD V USD V Eonia, Euribor, Forward Yields
Posted by Brian Twomey on February 8, 2015 at 7:10pmView Blog

EUR/USD Vs Eonia, Euribor and Forward Yields

When last EUR/USD was addressed in October in Eonia and Euribor terms, the EUR/USD traded between 1.2517 and 1.2248 with an expected break of 1.2248 to begin a new distribution that would take prices down to 1.1300 and lower. Not only did that scenario occur but Eonia and Euribor had to travel in negative territory in order to see lower EUR/USD prices.
It was ECB driven since Eonia and Euribor in its 16 year history never traded in negative territory. A negative price would always see an ECB rescue and a EUR support to bring Eonia and /or Euribor back to positive.
The difference between then and now is negative rates was planned when the ECB lowered the Refi Rate last June to 0.15, the Marginal Lending Rate to 0.40 and Minus 0.10 in the Deposit Rate. September again saw another cut to 0.5, 0.30 and negative 0.20 in the Deposit Rate.
The ECB entered a phase of “uncharted territory” as outlined in September by ECB’s Governing Council member Benoit Coeure in an address to the ECB’s Money Market Contact Group. The purpose of sustained and negative Eonia and Euribor was despite an experiment is to force banks to lend and borrow in the money markets rather than hand over 100 to the ECB and receive 95.
The goal is to smooth out not only excess reserves but to smooth lending and borrowing between banks in each of the European states. The ECB then becomes truly the lender of last resort and in the interim experimental period must also sustain a high tax on the Euro as well as tanking economic news quarter after quarter. Not only will EUR/USD not see any recovery short term but the negative interest rate studies by Silvio Gesell must be revisited. The negative Eonia and Euribor effects are seen in Forward Implied Yields.
Negative Forward Implied Yields in Germany confirms a downsloping EUR yield curve as 1 year rates, 1 year forward trades at minus 0.2363 and 1 year rates, 5 year forward trades at Minus 0.0015. The current German yield curve is negative 6 years out along the curve but positive up to the 7 year yield and confirmed as 1 year rates, 7 years forward remain positive. The corrollary is positive USD as 1 year rates in 2 year trades 1.17.
Eonia, in its own downsloping channel since the significant break in October, currently trades below its Daily and monthly averages and below Euribor monthlies. Eonia is in its correct position if continued negative interest rate strategies is the ECB way forward.
For EUR/USD, the monthly interest rate ranges are wide and found between lows at 1.0827 – 1.1816 above. To offer 1.1816 context. Not even the positive German 10 year – 2Y spread or 10Y – 3 Month spread offers a high of 1.1816 instead that range high is found at 1.1610 and a low of 1.1020. For the next few trading days, daily interest rate ranges are found between EUR/USD 1.1369 highs and 1.1253 lows due to a compression between Eonia and Euribor. To see range breakouts, Eonia and Euribor must make a move and the German 7 Year yield must either hold or allow EUR/USD its continued trend lower.
Trades will be posted here throughout the week.

Published FEB 8, 2015

Brian Twomey Inside the Currency Market,
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