Last time interest rates differentials on the short-end of the yield curve were this wide in favor of the euro was back in mid-December 2008. What was going on at that time? The Fed announced that they would add Treasuries to their previously announced plan to buy mortgage-backed securities.
When the Fed announced it would increase QE1, EUR/USD spiked up to 1.47 before easing below 1.2580 in spring 2009 when the banking crisis hit its nadir and the US forced the banks to recapitalize after the stress tests.
We are now at nearly 110 bp in favor of the euro as US 2s yield a scant 0.64% and German Schatz at 1.73%.
The wider interest rate differentials have been a key driver of the firmer euro. I’d be reluctant to fade this trend until that spread narrows.
