USD: Investors inclined to rebuild longs – SocGen

By FXStreet Research Team at Societe Generale, notes that a rise in USD rates had been missing from the rebound of the dollar from the early May low but this now has been partially addressed and in theory gives the dollar a base to strengthen, in particular as US real yields area also rising.

Key Quotes

“EU/US 2y rate differentials have widened over the past week from 104bp to 114bp. Though the Rsquare has dropped to just 0.12 (decreased correlation), it justifies a fair value closer to 1.10 than 1.12.

What could slow a fall in EUR/USD? Answer: the ECB (and a stronger CNY). No new major announcement is expected at the meeting on 2 June. Updated staff projections may even revise up inflation forecasts for this year due to higher oil prices. In March the ECB forecast 2016 CPI at 0.1% based on average oil prices of $34.9/bbl. Oil year-to-date is $38.3/bbl and the H2 futures average is around $49/bbl. In addition, ECB buying of securities will slow over the summer which will diminish the downward pressure on EGB yields and IRS which will limit the spread widening vs UST and IRS.

Long USD positions had been cut more generally against a handful of currencies …read more

Source:: FX Street