The EUR’s resilience in the face of a dovish ECB has encouraged a mistaken belief that the currency is being dominated by factors other than carry, notes HSBC.
To make the case for that, HSBC challenges two popular arguments, concluding they are not the key drivers of the EUR.
Myth 1: The EUR rise is being driven by the Eurozone’s improving current account balance.
"If current accounts mattered in G10 FX, we would be buying the USD ahead of all others, not the EUR. The US has seen a greater improvement in its current account balance than Europe, yet EUR-USD has risen. In fact, current account developments appear to explain very little about G10 FX during the financial crisis. In any event, the improvement in the Eurozone’s current account reflects weakness not strength. Extending EUR bull logic on this front would unpleasantly imply buying the currencies of any country suffering from a domestic demand collapse," HSBC clarifies.
Myth 2: The EUR rally is due to rising investments in Eurozone asset markets.
"The renewed appetite for Eurozone assets seems a more compelling EUR bull argument, but Europe is not alone in enjoying fresh inflows into equities. In addition, portfolio flows are not the biggest element of the Eurozone’s capital account, with net foreign direct investment and “other” investment outflows comfortably outpacing net portfolio inflows," HSBC adds.
Where To From Here?
"Beyond these specious myths where the EUR bull is the hero, the reality is that the outlook for monetary policy is now once again the key driver to the EUR and much of G10 FX. The Fed is heading towards the exit for QE, whereas the ECB is likely to ease again. It means the EUR bullish run is likely to meet a tragic end, like all good myths,
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