Brexit, however, isn’t just bad for the UK. It would have negative growth implications for the rest of Europe, and more importantly could cause wider political uncertainty. So far, the response to any market signs of loss of confidence in the Euro Area has come from the ECB and that isn’t likely to change. That in turn, is negative for the Euro, which this morning is hovering around psychological support at EUR/USD 1.10 and above the bottom of the uptrend of the last few months at 1.0950 or so.
I suspect that the break of 1.10 will see an acceleration downwards for EUR/USD, while a chart of EUR/JPY looks even more negative in the short term.
Chart 1 shows EUR/USD and the Bund/Treasury spread, which is a correlation that still works fine. This chart does not point to a dramatic move – unless we get either higher Treasury yields or lower Bunds. But it does show the recent peak in EUR/USD coming on February 11, when the Bund/Treasury spread was at its tightest and Treasury yields hit their most recent low.
Chart 2 shows EUR/JPY and the 10yeare yield spread in the Abenomics era. Yield spreads aren’t helping EUR/JPY but what stands out is that psychologically, this chart suggests the natural destination of the current move is for EUR/JPY to test 120 before it runs out of steam.
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