EUR turns from rates to equities play - AmpGFX

According to Greg Gibbs, Analyst at Amplifying Global FX Capital, equity investors prefer to take on the currency risk attached to their equity position; they need a good reason to hedge. 

Key Quotes

“In the recent past (before 2017), investors in European equities were inclined to hedge their EUR exposure, seeing it as a weak currency due expansive monetary policy, and political and macroeconomic risk.  However, that mentality has changed.  The European economy is in a broad, robust recovery, political risks have receded, and monetary policy easing is being gradually unwound.”

“The robust European economic recovery is fuelling confidence in its equity market, and equity investors in Europe are no longer so interested in hedging their EUR exposure, notwithstanding the deteriorating EUR/USD yield spread providing increased carry return for selling EUR/USD.”

“While the EUR/USD was more aligned to its interest rate spreads in the period from mid-2014 to end-2016, and remained correlated with long-term yield spreads into mid-2017, more recently it has become more correlated with European equities.”

“The EUR/USD has diverged for many years at a time from its yield spread.  While the recent divergence in EUR/USD from rate spreads is wide, it is not unprecedented.”