Strategy Video: Why is the Euro Rallying in Risk Aversion?
• The first thing that we do in a risk aversion shift is to sell risky exposure
• After the ECB cut benchmark rates to negative territory, speculators began using it as a funding currency
• How long the Euro bid lasts depends on how much carry was sourced in this
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Is the Euro a safe haven? Have the normal operations of risk trends completely fallen apart in the FX market? The answer to both questions is 'no'. The Euro is not a haven sought out in panicked trading conditions With lackluster growth, regular bouts of local financial crises and underlying conditions that necessitate exceptional accommodation from the ECB. Nor has the natural law of risk trends changed. We don't seek out greater exposure when fear is in full swing and greed doesn't allow us to hide hide when the capital markets are running. However, in the reach for yield that personifies the excess of risk exposure over the past years, we have seen the Euro take on a 'funding currency' role. In the first phase of risk aversion, we see the highly leveraged and low return positions reversed first. In unwinding carry, the Euro finds a bid. Yet, that bid won't last. In this weekend Strategy Video, we discuss why the Euro has advanced and how far it can go as sentiment unfolds.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.