The USD has been on a roll since the firm US inflation report earlier in the week and we are approaching the point where European trade balances will be impacted substantially by the rally in (energy) commodities. Even European Nat Gas seems to be on the move and pairing that move with the broader rise in Oil and Copper leads to a likely “flip” in the Eurozone trade balance.

When the Euro-zone trade balance shifts from positive to negative, we typically see an impact on the trend of the EUR, which is probably the last thing the ECB needs right now.

We sold a bit of ERU5 (September 25 EURIBOR futures) earlier this week as the ECB will probably struggle to outdove the forward pricing given the major repricing of the Fed Funds rate.

We see a few decent risk/reward relative value trades on the back of this. Long NOK/SEK, short AUD/CAD and rising spreads in 5yr USD-EUR rates all seem like decent RV trades in this environment of reflation and USD strength.

Chart 1: Is the Euro zone trade balance flipping due to energy import costs?