EUR: Safe haven? - Rabobank
In view of Jane Foley Senior FX Strategist at Rabobank, EUR is not established as a safe haven, but it does hold some of the standard characteristics of a safe haven and its behaviour this year is also suggestive that its appeal as a store of value has been bolstered.
“The strength of the recent rally in the EUR can quite simply be attributed to release of stronger than expected German Q3 GDP data and to the triggering of stops as EUR/USD broke above the 1.17 area. However, we would argue that there are other factors behind the EUR’s better tone. Concerns that there could be a delay in the introduction of a lower corporation tax in the US had already put the USD on the defensive towards the end of last week. It is likely that USD bulls will remain side-lined in the absence of further positive news regarding US fiscal reform. This increases the potential for the EUR to remains well supported.”
“While good activity data combined with low interest rates should help support investment into the region, the Eurozone’s huge current account balance suggests that the EUR should be relatively resilient to a general drop in risk appetite since it increases the chance that the EUR will demonstrate safe haven behaviour.”
“The ECB estimated that in August the Eurozone current account surplus stood at EUR33.3 bln. A current account surplus is a mainstay of a true safe haven currency due to the tendency of investors to move their funds close to home during a crisis. A budget surplus, strong liquidity levels and a stable system of government and law are other safe haven characteristics. While the EUR scores high on many of these factors, the EUR’s relative youth and the proximity of the debt crisis has to date questioned whether it can come close to matching the CHF’s credentials as a safe haven. This year’s improvement in the EUR’s fundamental backdrop, however, has had an impact on this perception and this has been demonstrated in the uptrend in EUR/CHF.”
“Since the start of the year EUR/CHF has appreciated by around 9%. We attribute these gains to the improved fundamentals behind the EUR which has allowed for a lessening of safe haven demand for the Swiss. For EUR/CHF to move back to fair value, the EUR’s attraction would have to continue to grow. At the moment the combination of low interest rates, strong growth and a relatively stable political backdrop suggests that Eurozone fundamentals may be as good as they get and we remain positive of the outlook for the EUR. We retain a 6 mth forecast of EUR/USD1.20.”