Is EUR a 'growth currency' vulnerable to risk aversion?
|EUR - a growth currency in the pre-crisis period, took over the role of the funding currency after the European Central Bank (ECB) hit the zero lower bound in 2014 and later adopted QE with negative rate policy.
Being a funding currency, the EUR responded positively to risk aversion and vice versa. For example - in August 2015, the PBOC shocked markets with Yuan devaluation, The rsulting broad based risk aversion saw EUR/USD rally to a high of 1.1713. As of today, the level is unchallenged.
On similar lines, the currency pair rallied to 1.1376 in the first quarter of 2016, tracking the oil-led risk-off in the global markets.
2017 - EUR a risk currency?
Trump trade and the US reflation story fizzled out in Feb 2017. Thus, US dollar started losing ground. At the same time, the Eurozone turned the corner… courtesy of ‘peak populism’ and strong economic data.
- The chart above shows, the rally in the S&P 500 index has been followed closely by the EUR/USD pair.
- The EUR/JPY cross also seems to have regained its status global risk barometer. The chart above shows the cross has closely tracked the uptick in the S&P 500 this year.
The fact that the EUR has also been responding positively to the stellar German and Eurozone PMI run also adds credence to the argument that it has been treated as a growth currency this year… PMIs had lost their charm (failed to move the EUR pairs) during 2015-2016. The chart below shows EUR has been closely following the German PMI.
Finally, the fact that the ECB is moving closer to QE taper also strengthens the EUR’s appeal as a risk/growth currency.
There is enough evidence that the common currency has been treated as a growth/risk-on currency this year, which means it is vulnerable to technical correction. EUR/USD looks set to test 1.18 and 1.20 this year unless we have a major correction in the stock markets.
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