Risk FX exploded higher at the start of European session trade on Friday boosted by the continuing improvement in EZ periphery bonds rates in the wake of yesterday’s announcement by the ECB to support the market. Spanish 10 year yields dropped another 32 basis points to trade at 5.69% well below the 6% level and markedly lower than the 7% rate that they were yielding just a few months ago.

The sharp decline in risk premia in the EZ sovereign debt has a dramatic impact on EURCHF pair which has been moribund at the 1.2000 peg for the better part of this year. EURCHF saw a vertical move in early morning European trade taking out the 1.2100 barrier for the first time since January of this year. The market is ripe with rumors of SNB upping its peg towards the 1.2200 level, but so far Swiss officials have made no explicit statement as to that speculation. However, the sudden move the lower in periphery rates has clearly reduced the risk of fracture in the EZ and as such has minimized much of the rationale for EURCHF short.

Therefore the complacent EURCHF shorts which have been sitting quietly in the pair waiting for it to break the 1.2000 peg have started to cover their positions contributing to the ongoing short squeeze in the pair for the second day in a row. Whether this rally is sustainable remains to be seen and will most likely depend on the continued improvement in the EZ sovereign debt yields. However, after months of flat lining EURCHF has finally seem volatility revive as the pair once again becomes the proxy for the EZ convergence/divergence trade.

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