Brian Martin, Head of Global Economics at ANZ, suggests that the EUR/USD has succumbed to extended market volatility and spiked higher and as long as risk assets remain under pressure, this may continue.
Key Quotes
“In response to the intensified stress in equity and credit markets recently, demand for safe-haven assets has been evident. In FX markets, the yen and euro have been no exceptions recently. One month implied volatility in EUR/USD has spiked higher. This is despite the collapse in the oil price, extended weakness in European banking stocks and guidance from the ECB that it will cut its inflation forecast and probably ease monetary policy at the 10 March meeting. Traditionally, all of these factors have been associated with EUR weakness.
The current rise in the EUR, therefore, would seem to be a function of market positioning and risk aversion – and the fundamental balance of payments and fiscal position tell us it is justified. However, the duration the current period of EUR strength will depend very much on whether this period of volatility proves temporary or more permanent.
There is little doubt that in the short term, central banks will be ultra-cautious given current and recent financial market volatility. The prospects for a quick repricing in the US yield curve to anticipate any profile resembling the FOMC’s dot points looks unlikely in the short term. For FX markets, that could allow the EUR/USD to retain its recent gains and unless the landscape improves quickly, EUR/USD could trade in a 1.10-1.15 range in coming weeks with an upward bias, despite the ECB’s indicated policy easing.”
