EUR/USD Undervalued

quick view chart

This picture is Eonia, the overnight rate to the ECB and governs all Europe and all EUR currency pairs. It is suppressed on purpose by the ECB to ensure always a lower yet severely undervalued EUR. Trump’s words this morning was again absolutely correct and this chart is the evidence, particularly when negative rates began in 2014 but the drop to negative began in 2012.

 

Brian Twomey

Fed Funds Rates, Averages and Correlations

Since the last Fed raise to 2.50, the daily trade able fed funds effective rate closed and traded at 2.38. From monthly averages 1 to 24 years, Fed Funds effective trades between 2.13 to 2.47. The wide distance between averages is explained by lower averages from the 4 year at 1.02 to the 22 year at 2.19 then 2.47 at the 24 year.

Middle averages since Dec 15 raises moved and are moving extremely slow to center positions to cause a wide divide between shortest and longest term averages. The entire 27 year average curve runs from 0.48 to 2.61 against a 1.54 mid point.

Middle averages overall are overbought yet shortest and longest term averages reside in good positions. A clear explanation why forecasts range from 1 cut, 2 cuts to zero cuts but a further commentary to exactly what the data reveals.

If the Fed cuts once to 2.25 then Fed Funds effective would trade at the 1 year average at 2.13 as a cut in headline means 12 1/2 points lower must factor to assess the position of the daily trade able rate. Further, 2 cuts means the Fed Effective rate trades at 1.88 and directly at the 20 year average.

Current ECB rate at 0.63 Vs 2.38 reveals a 174 point distance, a cut to 2.26 slashes the distance to 162 points, CAD 1.74 V 2.38 distance is 64 points and closest proximity to the FED among all G10 nations.

JPY 0.94 Vs 2.38 = 144 points, AUD 1.25 Vs 2.38 =113 points, NZD 1.50 Vs 2.38 = 88 points, GBP 0.70 vs 2.38 = 168 points and 212 points CHF from 0.26 to 2.38. Fed cuts to 2.26 compresses interest rate distances further.

Distance and interest rate compression as practiced since the 2008 crash means 21 currency pairs trade below 5 year averages while 8 currency pairs to include DXY trades above. The 8 currency pairs as follows share a commonality as all are considered USD pairs: EUR/GBP, EUR/AUD, GBP/AUD, EUR/NZD, USD/CAD, USD/CHF, EUR/CAD and DYY. Slash interest rate distances automatically cuts price movements.

Always was my contention in past writings the FED lifted rates far to late, to fast and at the 1.0 vicinity while post 2008 lows hit at 0.02 and 0.06 and a perfect time for liftoff if normalization was the serious policy move.

If the Fed cuts and the If question is why then I see a one and done without a need to move further, particularly when GDP averages remain extremely healthy to see 2.0’s from now to infinity.

Consider as well a cut means in positive correlation terms, lower 2 and 10 yields, S&P’s, DXY and negative to GDP and WTI. Understand WTI correlates to nothing, literally and is a lost price, floating without purpose or direction.
120 month data below per financial instrument.

FED Funds Vs DXY Correlates healthy 76%

Vital Fed Funds average = 0.98 Vs 92.44 for DXY yet the 5 year year is located at 94.72.

,Fed Funds vs 2 year Correlates 99%,

vital averages below 0.98 Vs 1.437 and 5 year at 1.347.

Fed Funds Vs 10 year Correlates 83%

Vital averages 0.98 Vs 2.382 and trades below the 5 year at 2.34

Fed funds Vs GDP Correlates minus 22%

Vital averages 0.98 Vs 2.20 GDP and 5 year average at 1.98

Fed Funds Vs WTI Correlates minus 57%

Vital averages 0.98 Vs 63.71 and 5 year average at 56.69.

Fed Funds Vs S%P’s Correlates 94%

Vital averages 0.98 vs 2300.348 and 5 year average at 2339.47.

The interesting aspect to GDP is AUD and NZD outperformed GDP in the United States every quarter since 1990 while the GBP and JPY under performed every quarter since 1990.

 

Brian Twomey