US Yield Advantage at 13 month Highs

The differential between US 10-year yield and Germany’s hit 13 month highs at +0.35% (US minus Germany), compared to the eight-month highs reached just last week.

Nine days after Germany’s ZEW expectations index shot up to a 21-month high in March, Germany manufacturing PMI fell back below 50, hitting its lowest level since November at 48.1. Germany’s services PMI slipped to 51.8 from 52.8, also its lowest since November, prior to the start of LTRO-1.

Out of Germany’s three different sets of business/sentiment indicators (PMI, Ifo & ZEW), the PMI is the only data group, which fell steadily since January. PMI surveys reflect the opinions of purchasing managers and decisions makers, with an emphasis on output, new orders, inventories, employment and prices across the manufacturing, construction, retail and service sectors. The ZEW survey does not share the credibility of the Ifo and PMI surveys in tracking and predicting German economic growth and the outlook for the eurozone. The ZEW survey involves responses from about 350 economists and analysts regarding the economic future of Germany for the next six months.

The other two surveys were quick to capture the notion that Germany remains resilient to the negative macro currents in the periphery as well as the market reactions to LTRO-1 (December) and LTRO-2 (February). The euro markets (FX & bonds) may find it hard to adjust to the ECB’s sudden removal of the possibility of further LTROs from recent rhetoric. This is unlike the Federal Reserve Chairman, who never misses a chance to allow the door open for a new round of asset purchases at each testimony.

As the Fed continues to recognise the uptrend in employment and business surveys (ISM & consumer sentiment) while the ECB renders eurozone banks dependent on three-year money, markets are already driving interest rate differentials towards US and away of eurozone. This is already weighing on 10-year yield spread between Germany and the US (at 13-month lows of -0.35%). Consequently, EUR/USD could well stat to follow interest rate differentials, and gradually reaches the $1.25 territory by mid Q2.

EUR/USD continues to adhere to the classically bearish Head-&-Shoulder formation and further breaking below the trendine support (below 1.3180) extending from the March 15 low remains valid. We extend our bearishness after the high-profile failure to regain 1.33 and to inability to close above the 100-day moving average. A break below 1.3145 (55-DMA), would signal the green light to 1.3010 next week