In his latest Macro View, Richard Jones, an FX strategist who writes for Bloomberg, explains the resilience behind the common currency which has ignored every adverse piece of news thrown at it, and identifies the one main reason it keeps “deying the doomsayers.”
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Euro Can Keep Defying Doomsayers, Thanks to Draghi
The euro rally is sustainable even amid the latest flare up of European political uncertainty.
A buoyant macro-economic environment partially explains the resilience, but most credit should go to the backstop offered by the ECB.
The laundry list of challenges — coalition talks in Germany, Catalan secession, an Austrian election — has failed to meaningfully impact either the single currency or the region’s sovereign yields. The Bloomberg Euro Index trades only about ~1% lower than the multi-year high seen in late August.
Mario Draghi’s “whatever it takes” rhetoric still inspires confidence in investors. Then add the not-insignificant fact that the ECB has bought more than 1 trillion euros ($1.19 trillion) of securities. Even with the specter of a potential taper, buyers of peripheral bonds know the central bank has their back.
If real pressure emerged, the ECB would doubtless be willing to deviate from the capital key to contain those risks. The bank has a proven track record of bending the rules when required.
A pick-up in both sentiment and hard data is contributing to the euro’s positive momentum, leading to a view among policy makers that the currency is rising for the right reasons,
Political and economic challenges remain. The case for structural reform remains as strong now as it has at any stage since the single currency was adopted. But investors seem optimistic that this can be achieved, especially if France and Germany begin to co-operate more than they have in the past.
Positive developments on that front would just provide the nitro boost to the durable and resilient euro appreciation trend.