EUR/USD may be at an extreme valuation, which may suggest a sell signal for the pair, according to a model produced from Deutsche Bank FX.
The DB model calculates the historical fair value of EUR/USD based on regressions of short-term rate spreads, equities, and Spain-German bond spreads, which suggest that EUR/USD should be trading around 1.35 percent.
Upon the publication of this DB research, EUR/USD was headed towards 1.40. Now, it has shot past that level to trade at 1.4162 at 11:31 a.m. ET.
Below 1.40, EUR/USD was not more than two standard deviations away from its fair value based on the DB model.
At 1.4162, however, it is above it and likely “at the turning point where the EUR/USD up move should be faded,” wrote DB analysts Alan Ruskin and John Horner.
They said one reason EUR/USD has trended higher is the squeeze of U.S. dollar longs. Another driver is the “growing belief” that China will provide support to the Eurozone bailout fund EFSF.
“Knowing a little more about Chinese/international involvement in the EFSF SPV will probably be the most important fundamental factor dictating a turn,” they wrote.