EUR: Now a politically-driven currency - SocGen

Kit Juckes, Research Analyst at Societe Generale, notes that for the last year, the euro has been kept down only by huge capital outflows from investors crowded out of domestic bond markets by the ECB's negative rates and bond-buying operations.

Key Quotes

“I have worried that ECB tapering and even, global risk aversion, could be a catalyst for those flows to slow and the euro to rally. My concerns haven't gone away but for the next six months they are trumped by fear that populist politics will migrate to Europe and infect a series of key votes in the coming months: the Italian constitutional referendum on 4 December, the Austrian Presidential election on the same day, the Dutch elections on 15 March and, most importantly of all, the French Presidential election in late April/early May. German elections are due later in the 2017 but this is enough to be going on with for now.”

“For the last 18 months or so, we've had more luck using long-term real yield differentials to help us understand the EUR/USD than nominal yields or short-dated rates. These alone have been a negative for the euro and on our US view will continue to be, though they don't argue for a break below 1.06 in the EUR/USD unless we get another 35bp widening in real yield differentials, which is more than the move we've seen so far. Possible, but not something that encourages thoughts of parity.”