EUR/USD: Keep In Mind The Risk Of A Sudden Sharp Squeeze By Nov-Dec - Danske

Danske Research discusses EUR/USD outlook and warns of increasing risk of a sharp sudden squeezes before year-end.

"The market is currently pricing the premium on EUR/USD FX forwards over year-end slightly higher compared to last year but if we take into account that the turn covers two days this year compared to three days last year the market is currently pricing year-end around the level it was realised last year. This suggests that pricing is about fair and maybe slightly on the low side if the factors above turn out to play a role.

However, before we get to year-end we could see spikes in the pricing as we saw during December last year if the market suddenly scrambles for USD. History suggests that pricing of year-end starts to move when we get into November," Danske argues.

Furthermore, the tightening of USD liquidity which is set to continue over the rest of year could lead the EURUSD OIS basis to widen again from current relatively tight levels, i.e. also leading to an increase in EUR/USD FX forwards. On this matter, in the near-term keep in mind redemptions on the Federal Reserve’s balance sheet at the end of August and September as well as corporate tax payments in the middle of September as the next important negative autonomous factors for USD liquidity," Danske adds.