Euro - The safe haven demand and Draghi

November 25, 2015

Jane Foley, Research Analyst at Rabobank, suggests that while the EUR is not a natural safe haven it has been clearly been displaying safe haven properties this year. 

Key Quotes

“If there another increase in geopolitical tensions, EUR strength could hamper the ECB’s attempts to stimulate the Eurozone economy.”

“Insofar as the Eurozone crisis is still working itself through the system in the form of Greece’s continued debt uncertainties and political upheaval in Portugal, the EUR is an unlikely safe haven. However, it performed well this summer on the back of Chinese growth concerns.”

“The EUR was well correlated with the JPY this summer with both showing safe haven qualities. The implication is that the EUR could rise again if demand for safe haven assets rise. We would expect, however, that the extent of any EUR gains, would likely depend on market positioning.”

“We have repeatedly argued that a significant factor behind the EUR’s strong performance this summer was the fact that the market was very short. This is related to the fact that the ECB’s accommodative policy had turned the EUR into a funding currency. When risk aversion spiked, there was a rush to cover these extreme EUR short positions.”

“During October risk appetite improved and in recent weeks the determination of ECB President Draghi to signal that further ECB policy action could be on the cards has resulted in a renewal of downside pressure on the EUR. Although it follows that an increase in geopolitical tensions could trigger some renewed short covering we would not expect it to match the pace of that seen in August since the build-up of EUR shorts is less extreme than it was at the start of the year.”

“Also, although the EUR could see marked gains against some high risk currencies, upside in EUR/USD could be muted by coincident demand for USDs. Our central view is that EUR/USD will move lower into 2016 based on widening interest rates differentials. However, we remain reluctant to put parity on our forecast table. This is partly due to risk that moderate US inflation will result in a shallow trajectory of Fed rate hikes next year, the other factor is that risk appetite may not be strong enough for investors to re-build EUR shorts to the same extreme levels noted at the start of this year. We are forecasting a move to EUR/USD1.05 on a 3 mth view.” 

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