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Forex Flash: Investors seek tail-risk removal from Eurozone – UBS

FXstreet.com (Barcelona) - On a structural level, the European asset selling couldn't have come at a worse time. “The 'risk-on' moves in the beginning of the year, where overseas investors returned to what they perceived as an undervalued but high-(dividend) yielding market was a major source of support for the currency.” Notes Research Analyst Gareth Berry at UBS.

Indeed, tail-risk removal from OMT played the most important part, which is broadly consistent with the flow patterns seen in early-to-mid 2012: the last round of significant flows back into the Eurozone came from asset managers seeking to ride the 'tail-risk removal' rally post-LTROs. The problem for the Eurozone is that the early 2013 move failed to match the 2012 counterpart in terms of duration, even though the ECB would argue that the OMT should have been a much stronger version of tail-risk removal compared to the LTRO, hence its impact should have been much stronger.

Finally, the disappointing results of the Italian elections may have played the role of the initial 'checkpoint', but Cyprus was the 'game changer’, which would have ramifications for the rest of the year. Even more concerning is that selling could continue for some time to come unless investors believe that we have seen a structural turnaround.

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