May 21st, 2009, 11:36 am
I think an important one to look at when looking at eurusd is the front eurodollar. Jul 2008, when the cross moved from 1.60 down to circa 1.25, the front eurodollar sold off approx 100 ticks in the same period. This was a period where no one expected the fed to be hiking. Instead we had lehmans go bust , libor ois blowing out to historical levels, o/n dollars tading above 10% etc dollars were king. Hence they ended up down at 1.25. However, at the start of dec 08, when the eurusd cross went from the high 1.20s to mid 1.40s, the front eurodollar rallied approx 100 ticks. ( i know they cut again, but the libor ois situation was beginning to improve before large falls end of dec start of jan 09). Also, if you look at the situation since the start of april, libors have been collapsing and the front ed has been marching higher - and the eurusd has gone from circa 1.29 to where it is today. My feeling on this is that its quite important to look at the libor ois situation when looking at eurusd - as the premium on dollars lowers - i feel the cross will go higher - question is for how much longer can libors fall? Do we get another blow out. 3m usd libor came in at .66125 today...usd 3s1s basis is collapsing as well...i think eurusd can march higher for another while. Granted better equity markets do help libors to go lower. So alot will count on whether equities can keep going also. But my feeling is that equities will come off on the back of some sort of negative dollar funding story - either bank or corp related. But all appears fine on that front for the time being....so stay long until you see a turn in the libors.