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MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
USD
Earlier this week the German trade balance delivered a surprise deficit for May. Whilst the US trade position has been a long term headwind for the USD, as we outline below, relative terms of trade (ToT) shifts have certainly moved in favor of the USD over the recent period.
- The first chart below plots the recent history of the Citi ToT proxies for the USD, EUR and JPY. Relative shifts have certainly favored the USD, particularly in the past 6 months.
Fig 1: Citi USD ToT Outperforming EUR & JPY ToT Indices
Source: Citi, MNI - Market News/Bloomberg
- The degree of divergence though is best highlighted by long run charts of the differential the USD has with the ToT proxies for both EUR and JPY, see the second chart below.
Fig 2: Long Term Differentials Highlight The Degree Of Divergence
Source: Citi, MNI - Market News/Bloomberg
- The relative EUR-USD ToT differential is enjoying a higher correlation with EUR/USD spot moves, see the third chart below. For the past 6 months the correlation has been at 80% in levels terms.
- Deteriorating trade positions is a clear EUR headwind, although fears are also rising an energy supply crunch could tip the area into recession. This is feeding into higher US-EU yield differentials, with the 2yr spread pushing back above +260bps, up from early June lows of sub +200bps.
- For JPY, as we have highlighted previously, the negative terms of trade shock is arguably reducing the benefits the yen sees from risk off episodes, particularly in the equity space. Of course, the large divergence in monetary policy settings is more important in terms of driving higher USD/JPY levels.
Fig 3: EUR/USD & Relative ToT Differential
Source: Citi, MNI - Market News/Bloomberg
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
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