EURUSD - the rearmament laggard

The Euro has bounced to a 3 month high this week but, relative to the move in bond and equity markets, it has lagged the re-pricing of European assets as the continent starts to rearm itself.

Qi's macro-warranted fair value is now over 1.10. That number was closer to 1.04 as recently as late February. 

The biggest driver of the model is interest rate differentials. So, in short, EURUSD is lagging the sharp re-pricing of European yields with 10y UST-Bund spreads ~50bp narrower in just two weeks. 

Narrative-based investors are still debating the threat of US tariffs versus upside potential to European growth. Meanwhile, Qi Fair Value Gaps have done a decent job of capturing turning points of late and, at -1.2 sigma (-3.0%), the maths says the risk-reward favours EURUSD upside as an efficient European rearmament trade from here.

SOXX - mean reversion potential

For equity bulls looking to buy the dip, what's the cheapest US industry relative to Qi’s macro-warranted fair value? SOXX, the iShares Semiconductor ETF.

SOXX is trading at a 2.2 sigma (14.6%) discount to Qi’s model value. That's the largest Valuation Gap since summer 2022.

Macro explanatory power is high at 67% and the spot price has been closely correlated to the FVG, suggesting we should pay attention to mean-reversion potential.

The macro regime is clear. It wants an improving growth / inflation trade-off: decent economic growth / higher commodities; alongside tighter credit spreads, a weaker Dollar and lower inflation expectations.

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Swissy - choose the Franc, not SMI

The SMI screens as the richest global equity market on Qi. It sits 2.2 sigma (6.2%) rich to aggregate macro conditions. This is the first time in Qi history the FVG has exceeded two standard deviations. It looks an efficient target for any bears looking to fade this run in European equities.

Meanwhile, back in fx, USDCHF shares many of the same characteristics as EURUSD. Qi's macro-warranted model value has fallen almost 3% since mid-February; the cross while down, is lagging the move and sits 0.9 sigma (2.6%) rich.

Again, the fx market is not reflecting this week's re-pricing. Both in terms of rate differentials but also in risk appetite. The inability of the Dollar to rally after Monday's Canadian / Mexican tariff announcement suggests Trump policy uncertainty is starting to undermine its role as a safe haven. Qi shows spikes in VIX and equity volatility are negative for USDCHF. Put another way, the Swiss Franc remains the ultimate flight-to-quality trade.

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