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28 May 2013
Flash: EUR cross gains coincide with Spanish relief - BMO Capital Markets
FXstreet.com (Barcelona) - Stephen Gallo, European Head of Currency Strategy at BMO Capital Markets notes that EUR/AUD and EUR/CHF are up 14.0% and 4.0% respectively from their end-July levels at current spot prices, and these moves appear to have coincided, broadly, with the return of external flows into (for instance) Spanish asset markets.
He feels that these flows, in turn, appear to have lessened the need for the Bank of Spain (Eurosystem) to finance a significant portion of the account gap on a monthly basis. All in all then, he feels that there is enough evidence here to support a degree of EUR strength on the cross rates, but not necessarily to the same degree going forward. Looking specifically at EUR/AUD, he writes, “if we “back-out” the 8.0% decline in AUD/USD from the 14.0% gain in the cross in order to account for the component of EUR/AUD gains due specifically to AUD weakness, we are left with a 6.0% gain in the cross, which is still above the gain seen in EUR/CHF over the same time frame.”
He feels that when investors consider this, alongside of the weakness in the overall growth outlook inside of EMU, as well as the fact that Spain’s external financing needs are shrinking in-line with the strengthening of the balance of payments deficit, it becomes apparent that there may be elements of “maturity” in this current phase of EUR-positive capital flows at present. Further, he sees that EUR/CHF gains have also not kept pace with gains in other EUR cross rates, and one might argue that a bigger move up in the former is both a necessary pre-condition for and a concurrent barometer of overall EMU stability. With this in mind, he will remain reasonably suspicious of aggressive buying in EUR/AUD above 1.3200 as long as there is more “two-way” risk in the JPY cross rates and the JPY is not seen fully as a significant “sell on rallies”.
All things taken into consideration, various factors at this stage make him more cautious than not towards EUR strength in various places. For the time being, he does not include further or destabilising declines in the AUD in his base case outlook for the currency, partly because of the “advancement” it has made as a key component of global reserves over time. Nevertheless, broad based capitulation is still an important downside risk for the currency and it’s not one he feels investors can fully ignore. He writes, “It would appear as if a quarterly close above 1.3860 (Q3-2011 close) in EUR/AUD would be needed to prompt speculation of a move to 1.5000. We can’t rule it out, but our view as of today is that such gains are not fundamentally justifiable on the basis of a firm EUR alone.”
He feels that these flows, in turn, appear to have lessened the need for the Bank of Spain (Eurosystem) to finance a significant portion of the account gap on a monthly basis. All in all then, he feels that there is enough evidence here to support a degree of EUR strength on the cross rates, but not necessarily to the same degree going forward. Looking specifically at EUR/AUD, he writes, “if we “back-out” the 8.0% decline in AUD/USD from the 14.0% gain in the cross in order to account for the component of EUR/AUD gains due specifically to AUD weakness, we are left with a 6.0% gain in the cross, which is still above the gain seen in EUR/CHF over the same time frame.”
He feels that when investors consider this, alongside of the weakness in the overall growth outlook inside of EMU, as well as the fact that Spain’s external financing needs are shrinking in-line with the strengthening of the balance of payments deficit, it becomes apparent that there may be elements of “maturity” in this current phase of EUR-positive capital flows at present. Further, he sees that EUR/CHF gains have also not kept pace with gains in other EUR cross rates, and one might argue that a bigger move up in the former is both a necessary pre-condition for and a concurrent barometer of overall EMU stability. With this in mind, he will remain reasonably suspicious of aggressive buying in EUR/AUD above 1.3200 as long as there is more “two-way” risk in the JPY cross rates and the JPY is not seen fully as a significant “sell on rallies”.
All things taken into consideration, various factors at this stage make him more cautious than not towards EUR strength in various places. For the time being, he does not include further or destabilising declines in the AUD in his base case outlook for the currency, partly because of the “advancement” it has made as a key component of global reserves over time. Nevertheless, broad based capitulation is still an important downside risk for the currency and it’s not one he feels investors can fully ignore. He writes, “It would appear as if a quarterly close above 1.3860 (Q3-2011 close) in EUR/AUD would be needed to prompt speculation of a move to 1.5000. We can’t rule it out, but our view as of today is that such gains are not fundamentally justifiable on the basis of a firm EUR alone.”