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EUR: Easing failed to keep the single currency down – SocGen

FXStreet (Delhi) – Research Team at Societe Generale, note that the euro has strengthened against all its major counterparts in G10 and emerging markets since the ECB launched its asset purchase programme in March.

Key Quotes

“Withering US rate hike expectations and the repatriation from emerging market assets mean that lower interest rates could be a more powerful weapon to stop euro appreciation.”

“The expansion of the ECB balance sheet by close to €500bn over the past seven months has not stopped the euro from strengthening against all of its G10 and emerging market counterparts. This is partly due to the single currency’s safe haven status (balance of payments surplus) which allowed the euro to thrive during the selloff in equities and commodities over the summer. The EUR has posted its largest gains since March of 23% against the BRL, 15% against the COP and 10.5% against the AUD.”

“The logic of a central bank boosting its balance sheet (money printing) and a stronger currency turn economic logic on its head, but in this case the currency’s resilience is a corollary of interest rate expectations in the US (rate hike scepticism), as well as the malaise in emerging markets and lower commodity prices.”

“The withering of US rate hike expectations has given the single currency another lift, forcing the ECB to come off the fence and prepare for an expansion of its existing QE programme (SG economic forecast an expansion of the existing programme in March 2016).”

“By raising the bond purchase limit from 25% to 33%, president Draghi at the September meeting effectively signalled that he is ready to act again. But this has not dissuaded investors. After a brief pullback to 1.1105, EUR/USD has gained just over 3% as now flirts with a test of 1.1460, the 18 September high (the day after the last US FOMC meeting).”

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