Friday, September 18, 2015

Euro: On its way to Japanification – SocGen

FXStreet (Delhi) – Research Team at Societe Generale, suggest that Euro has become a 'funding currency' that is liable to appreciate sharply in times of risk aversion and turmoil like the yen.

Key Quotes

“Concerns about emerging market slowdown and persistent monetary policy uncertainty have delivered weaker equities across Europe and are threatening to do the same in the US. Are the yen and Euro up because we're 'risk off' or because the Fed has successfully fired a volley in the fight against a strong currency - the dollar's down against everything this week except for the Brazilian real, the Indonesian Rupiah and the Israeli Shekel.”

“The big swing factor is that in the last 12 months, European investors have bought Eur 33bn in long-dated foreign bonds, compared to Eur 147bn in the same period a year ago, while foreigners have bought Eur 94bn in European bonds, compared to 180bn a year ago.”

“ECB QE and interest rate policies are pushing money out in search of yield elsewhere, while squeezing foreign investors out. There's still a substantial inflow into equities (EUR 220bn in the last year) but that too is tailing off from a peak of Eur 328bn in the year to March.”

“None of this is necessarily going to tell us where the Euro is heading, but it does show how it is ECB policy that drives the Euro down, while periods of risk aversion can send it up. The correlation between EUR/USD and relative EU/US short rates has weakened and the correlation with risk aversion measures like VIX has either fallen or changed sign.”
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