Talking Points:
• The Euro is neither a safe haven nor carry currency, but it does have a connection to risk appetite
• ECB efforts to curb financial market and sovereign debt market risks triggered a massive capital inflow
• A wave of investment from July 2012 has seen international exposure hit extremes
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When we look to majors like the US dollar and Japanese yen, the primary fundamental catalyst is clear: safe haven and carry demand. But what drives the Euro? The currency is a primary safe haven nor a high-yield carry unit. However, there is a distinct connection between the its future bearings and the sense of risk appetite across the global capital markets. In the aftermath of the Eurozone's financial crisis, moral hazard from global stimulus was driving investment to whatever meaningful rate of return could be found. With the risk of a systemic crisis in the Euro-area fading, high-yields on sovereign bonds and capital market assets drew capital in waves. Now, 18 months later, international exposure to the region has grown extreme and premiums have all-but vanished. This presents a material risk to the Euro going forward. In today's Forex Strategy Video, we discuss the Euro and its main fundamental driver moving forward.
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