BAML: EUR/USD correlation breaks down. What it means

BAML on EUR/USD

Bank of America Merrill Lynch FX Strategy Research notes an unusual break of EUR/USD correlation with risk this week.

"This week European stocks rallied as French election worries evaporated and EUR/USD went up as well. This is unusual. In recent years, EUR strengthened when risk increased, not decreased," BofAML notes.

However, BofAML argues that this break in EUR/USD correlation with risk is likely temporary, projecting that the pair should return to its established dynamics of strength during risk-off episodes and weakness during risk-on phases.

"EUR/USD became positively correlated with risk over the past three years. Diverging policies of ECB and the FED raised USD carry, while EUR became a funder. Then carry-trade dynamics support EUR short covering in a risk-off and EUR sales in a risk-on. With US rate spreads exceeding G10 average the most in 10 years, we expect the EUR-risk correlation to turn positive once again for these structural reasons," BofAML clarifies.

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BAML: EUR/USD correlation breaks down. What it means
BAML: EUR/USD correlation breaks down. What it means
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