16 Jun 2015
Why is the Euro holding in to Greece related pressure? – Nomura
FXStreet (Barcelona) - Jens Nordvig and David Fritz, FX Strategist at Nomura, highlight key reasons behind the EUR’s strength in spite of Grexit and Greece default concerns.
Key Quotes
“EUR/USD is up, albeit moderately, on Friday and Monday (against the global backdrop of a mostly stable USD). Even EUR/CHF, normally very sensitive to risk aversion and Eurozone tensions, rose on Monday.”
Why is the Euro holding in?
There are at least three possible interpretations:
“1) Noise is at play. One interpretation is that the Greek news is feeding into the Eurostoxx and peripheral spreads in a fashion consistent with past correlations, and that EUR will soon follow. In other words, the price action in recent days in FX space is noise, which should be ignored, as old correlations will re-establish themselves soon.”
“2) Greece itself ultimately does not matter too much to EUR. In a world where contagion effects can be controlled though the enhanced backstop infrastructure (ESM, OMT, QE). In this world, ending the Greek drama may remove some uncertainty, and perhaps support the Euro on the margin (if there are second-round effects; in terms of political contagion to other countries, that is a different matter, but we have not seen much of that).”
“3) EUR is the new JPY. This means that risk aversion is increasingly supportive of the Euro. This makes conceptual sense, since the Eurozone has the world’s lowest interest rates (excluding the smaller European economies). As such, even home-grown risk aversion can counterintuitively support the Euro (like the Japanese earthquake did for JPY back in 2011). There has been some evidence of such patterns over the last six to nine months, but it has not been completely clear cut in correlation.”
Key Quotes
“EUR/USD is up, albeit moderately, on Friday and Monday (against the global backdrop of a mostly stable USD). Even EUR/CHF, normally very sensitive to risk aversion and Eurozone tensions, rose on Monday.”
Why is the Euro holding in?
There are at least three possible interpretations:
“1) Noise is at play. One interpretation is that the Greek news is feeding into the Eurostoxx and peripheral spreads in a fashion consistent with past correlations, and that EUR will soon follow. In other words, the price action in recent days in FX space is noise, which should be ignored, as old correlations will re-establish themselves soon.”
“2) Greece itself ultimately does not matter too much to EUR. In a world where contagion effects can be controlled though the enhanced backstop infrastructure (ESM, OMT, QE). In this world, ending the Greek drama may remove some uncertainty, and perhaps support the Euro on the margin (if there are second-round effects; in terms of political contagion to other countries, that is a different matter, but we have not seen much of that).”
“3) EUR is the new JPY. This means that risk aversion is increasingly supportive of the Euro. This makes conceptual sense, since the Eurozone has the world’s lowest interest rates (excluding the smaller European economies). As such, even home-grown risk aversion can counterintuitively support the Euro (like the Japanese earthquake did for JPY back in 2011). There has been some evidence of such patterns over the last six to nine months, but it has not been completely clear cut in correlation.”