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Forex Flash: EUR/USD open to 1.2600 - Societe Generale

FXstreet.com (Barcelona) - Senior FX Strategist at Societe Generale, Sebastien Galy notes that with the break of 1.2800, EUR/USD is open to a move to the next level in sight at 1.2600.

He believes that it suggests a strategy of selling on short covering to target the new lower range with a bottom at 1.26. Ae writes, “As a reminder our year end forecast goes into the 1.20s. Models have worked surprisingly well for EUR/USD, the last short covering came close to 1.31 given by the 80 percent quantile model, though our traders nailed it perfectly with a call for 1.3050.”

Elsewhere, he adds that sovereign demand is the usual rallying cry for anyone long EUR/USD. He notes that their incentives have changed in recent years, turning them to a more standard mandate of liquidity management, which suggests little incentive for aggressive FX allocation (yield and accrual win the game vs fx allocation over decade long horizons) and catching a falling blade. Nonetheless, he writes, “They are probably accumulating USD at a faster pace than before as global trade picks up. This may explain the surprising demand from China for longer dated US bonds (tic data) as it forces some to search for a better mix of yield adjusted for the credit risk taken. It suggests that this demand will eventually materialize but in a less aggressive fashion than in past years as the modus operandi changed.”

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