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8 Mar 2013
Forex Flash: The Euro´s new regime - Nomura
Nomura strategists note that this week was focused on central banks, including the ECB which held rates. However, the see that in terms of price action, USD was the strongest performer in the G10 and EM and equities were higher.
Looking to the Euro, they feel that the initial move lower in EUR/USD was driven by an increase in the risk premium, However, since then the pair has rallied significantly, despite that tightening of peripheral spreads. They think that EUR is in a new regime where growth underperformance is the key driver. The OMT implicit backstop has been sufficient to remove funding concerns. Indeed, they add that various measures of systematic tension have dropped considerably since summer 2012.
They write, “Over February we saw how large surprises impacted EUR significantly and we think this is likely to remain the case. In the risk premium regime, foreign buying and selling of eurozone fixed income was a key factor in EUR direction. In the current growth-driven regime, relative equity flows are likely to be more important and we are already starting to see equity outflows from the eurozone.”
With the EUR/USD around 1.30, they think our current forecasts of 1.28 for Q2 and 1.25 for Q3 still look reasonable. Hence, we would continue to seek opportunities to sell EUR on rallies. We also discussed dollar dynamics in the context of US data, noting the diverging opposing forces in the dollar outlook.
Looking to the Euro, they feel that the initial move lower in EUR/USD was driven by an increase in the risk premium, However, since then the pair has rallied significantly, despite that tightening of peripheral spreads. They think that EUR is in a new regime where growth underperformance is the key driver. The OMT implicit backstop has been sufficient to remove funding concerns. Indeed, they add that various measures of systematic tension have dropped considerably since summer 2012.
They write, “Over February we saw how large surprises impacted EUR significantly and we think this is likely to remain the case. In the risk premium regime, foreign buying and selling of eurozone fixed income was a key factor in EUR direction. In the current growth-driven regime, relative equity flows are likely to be more important and we are already starting to see equity outflows from the eurozone.”
With the EUR/USD around 1.30, they think our current forecasts of 1.28 for Q2 and 1.25 for Q3 still look reasonable. Hence, we would continue to seek opportunities to sell EUR on rallies. We also discussed dollar dynamics in the context of US data, noting the diverging opposing forces in the dollar outlook.