Is Safe Haven Appeal Behind EUR Strength, if so, Can It Be Sustained?

02/10/2016 9:00 am EST

Focus: CURRENCIES

For the benefit of all traders in the realm of forex, Yohay Elam of ForexCrunch.com shares the Credit Agricole team’s take on what’s behind the recent strength of the euro and whether or not they feel it can be sustained.

The doom and gloom sends the safe haven euro to 1.13. The team at Credit Agricole explains what’s going on and examines if this can be sustained:

Here is their view, courtesy of eFXnews:

EUR regained ground broadly in recent days with investors attributing the move to the currency’s growing safe haven appeal. We agree that the EUR’s superior liquidity should continue to provide support especially against the risk-correlated G10 smalls. That said, the fact that investors have rediscovered the EUR safe haven appeal only recently strikes us as rather odd.

Indeed, the single currency was languishing throughout the early stages of the latest market sell-off, which started in January. In addition, the EUR is supported by safe haven inflows at a time when the sell-off in the EuroZone bank stocks and peripheral bond markets is intensifying. Needless to say, the apparent calm in the peripheral bond markets and the recovery in the banking sector was a key ingredient of investors’ confidence in the EUR during the bouts of risk aversion in recent years.

We think that the sell-off in the EuroZone peripheral bonds and bank stocks and the latest EUR-resilience are connected. In particular, we suspect that the surge in the BTP and Bond yields has eroded the value of the bonds held by foreign investors recently. In turn, the drop in their EUR-exposure necessitated the reduction of the short-EUR hedges with foreign investors forced to buy back the single currency in the FX spot market. In addition, concerns about the health of the EuroZone financial sectors have evoked memories from 2012 debt crisis when banks were repatriating money from abroad and supported EUR. To read the entire article click here…

By Yohay Elam, Founder, Writer, and Editor, ForexCrunch.com

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