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       #Post#: 285--------------------------------------------------
       Great Graphic: Euro and Two-Year Interest Rate Differential
       By: Marc Chandler Date: December 30, 2014, 9:35 pm
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       There are many things behind the decline in the euro that pushed
       from $1.40 in early May to fresh two-year lows yesterday.
       Chief among those reasons, we posit, is the diverging trajectory
       of monetary policy.
       The Great Graphic, created on Bloomberg, shows the euro-dollar
       exchange rate (yellow line) and the discount Germany pays under
       the US to borrow 2-year money (white line).  Here is Q4 the two
       time series appear to be moving in lockstep again after
       diverging somewhat in Q3.
       Each side has had its own perturbations.  The German two-year
       yield fell below zero in August and has not been in positive
       territory since then.  It did recovery from -10 bp to almost
       flat in late November before falling new amid heightened
       speculation of a sovereign bond buying program in early 2015.
       It made new record lows early today near -11 bp.   The limited
       contagion of Greek political uncertainty, and the
       intensification of deflationary pressure in Spain (-1.1% vs
       -0.7% consensus and -0.4% in November) has kept expectations of
       ECB bond buys elevated.  Italian, Spanish and Portuguese 10-year
       bond yields all fell to record lows today.
       The US 2-year yield 50-60 bp in late summer before being halved
       to 24 bp in mid-October.  However, the real sector data,
       including various labor market measures, have continued to
       improve, and the forward guidance by the Fed's leadership has
       given investors warning of a rate hike around the middle of
       2015, barring a significant data surprise.  The yield reached
       almost 75 bp last week, the highest in three years.  The
       pullback in the US 2-year yield (now near 67 bp) and the 7 bp
       narrowing in the premium over Germany may signal a near-term
       consolidation phase for the euro, which fits nicely into the
       light participation expected now until early next week.
       Marc Chandler
       Marc to Market
       www.marctomarket.com
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