“Another Plank” Supporting The Dollar Has Been Removed

With the broad dollar sinking…

…and the euro hitting six week highs (well on its way to a YTD peak)…

…and a “dovish” Fed hike having triggered a rally in rates, it’s worth connecting the dots in terms of assessing the extent to which rate differentials still support the structurally strong USD thesis.

Make no mistake, this is a pretty important point, which is why we thought the following was worth presenting.

Via Bloomberg and Macro Man

Another plank supporting U.S. dollar strength has been removed, if only temporarily.

• Since the election, 200 has been firmly grounded support in the Treasury-Bund spread, having held on several occasions. Not today, as the spread is currently 198 bps. The implication for EUR/USD is pretty clear.

• The next technical level for the spread is 191 bps, the 61.8% retracement of the move since the election. If that goes, the risk is that the spread retrenches all the way back to 164 bps, presumably taking the euro with it.
• Selling Bobls looks like the clearest bond trade out there at the moment. That probably implies more upside risk for the euro.