We simulated a scenario where the 10-year Treasuries hit 5.0%, based on the past year of EUR/USD coefficients. We estimate the pair would be trading around 1.02 with 5.0% 10Y yields. That would be an approximate 3.5% drop from current levels, the same kind of depreciation observed in the period when UST 10Y yields rose from 4.0% to the current 4.50% levels (EUR/USD sliding from 1.10 to 1.06).
A look at recent EUR/USD correlations suggests that the pair has responded to back-end US yields just as much as short-term swaps. All in all, we estimate 1.02 as the most likely bottom for EUR/USD in a scenario where the US bond sell-off continues.
Our baseline scenario in the medium term, however, signals the opposite. ING’s economics team is expecting a sizeable re-rating in the US activity outlook by the first quarter of next year as excess savings are drawn down and the consumer spending support to the US economy dwindles.
We think 1.05 may be the bottom for the pair in current conditions, but as discussed, a drop all the way to 1.02 cannot be excluded.
- ING FX Strategy
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