Brocker.Org: Markets to focus on ECB policy and the recovery in Eurozone growth – SocGen


Kit Juckes, Research Analyst at Societe Generale, suggests that post Emmanuel Macron victory in French presidential elections, short-term profit-taking notwithstanding, a convincing win opens the door for the markets to focus on ECB policy and the recovery in Eurozone growth. EUR/JPY will gain, HUF and PLN will gain more

Key Quotes

The euro went into the French Presidential election close to its highest level (in tradeweighted terms) since the US Presidential election in November. A win for Emmanuel Macron was already 80% priced-in so there likely will be a danger in the near term. We see profit-taking on long euro positions. The EUR/USD in particular appears to have risen further in recent days than is consistent with the moves we’ve seen on bond yields. Looking further ahead however, the reduction in political uncertainty allows the focus to shift back to the prospect of a normalisation of ECB policy, and the euro should benefit from that.”

Swiss sellers support euro-proxies? The Swiss National Bank released April FX reserve data for April last week, showing a CHF66bn increase since October to CHF695.5bn. The main driver of growth in reserves is intervention to prevent the Swiss franc appreciating further against the euro, and any EUR/CHF strength in the coming days will trigger SNB selling. They invest the bulk of their reserves in short-dated government debt, of which the largest part is in euro-denominated, and therefore very, very low-yielding bonds. If this happens, it will hold back the euro, and the real short-term winners will be euro-satellite currencies (SEK, PLN, HUF, RON).”

The balance of payment and policy normalisation. In the two years before the ECB adopted its combination of negative rates and asset purchases in 2015, the EUR/USD trades in a 1.20-1.40 range, averaging 1.31. Since the ECB has adopted those policies, the EUR/USD has traded in a 1.03-1.17 range, averaging 1.10. The ECB’s exceptional policy stance no longer seems justified and even if a return to the 1.20-1.40 range isn’t imminent, the average EUR/USD rate is unlikely to be as low as 1.10 over the next couple of years. The risk is that, just as ECB policy crowded investors out of European assets (particularly bonds) and helped recycle the eurozone’s current account surplus, so any shift away from negative rates and asset purchases will allow yields to rise and funds to flow back into euro, triggering a sharp appreciation of the euro.” 

We prefer long EUR/JPY positions to EUR/USD at this stage. The Fed may be tightening policy at a glacial pace but they are still tightening. The BOJ by contrast maintains its stance of anchoring JGB yields and that leaves the EUR/JPY more sensitive to a rise in German Bund yields. 10y-Bund yields have been depressed by political uncertainty and we expect a move to 1% by yearend. That suggests plenty of EUR/JPY upside potential.”