Salient to Investors:
The 90-day correlation between changes in the euro and a Citigroup index of bond and swaps risk has turned positive for the first time since November 2008, indicating the euro is gaining favor as investors’ perceptions of turmoil in financial markets rises. Hedge funds et al are the most bullish on the euro since 2011.
Valentin Marinov at Citigroup said the euro remains resilient and repatriation from emerging markets is playing an important role, and predicts the euro will end the year at current levels and then fall to $1.30 by June 2014. The median analyst sees the euro falling to $1.28 by year-end, and then to $1.26 by June 2014.
EPFR Global said more than $47 billion has left global funds investing in emerging-market bonds and stocks since May, and the outflow in 2013 to $7.5 billion. Outflows last week were the highest in 2 months, with record withdrawals for Mexico and Philippine equity funds.
Sebastien Galy at Societe Generale said the euro is perceived as a safe haven in the current environment, where we’re not in a G-10 crisis, but an emerging-market one. Galy said people who were wrongly very negative on the euro zone have now changed their mindsets.
CFTC data shows futures contracts signal more gains for the euro.
Economists predict Germany will grow 0.5 percent in 2013, the euro area will shrink 0.6 percent, and the US will expand 1.6 percent.
Simon Derrick at Bank of New York Mellon said that Germany might be showing positive signs, but we still have horrific numbers in peripheral Europe, so the likelihood markets will outperform starts to dwindle. Derrick said the euro may fall to $1.25 in 2013 if the Fed tapers and investors start pricing in higher interest rates.
IMF data shows the euro’s share of worldwide currency reserves remained above levels immediately after its 1999 debut: 24 percent in March 2013 versus 28 percent in September 2009 and 17 percent in September 2000.
BIS said the euro is the most widely traded currency after the dollar and accounted for 33 percent of average daily turnover in foreign-exchange markets in April, versus 87 percent for the dollar. (Foreign-exchange trades involve 2 currencies, so the sum total of percentage turnover is 200 percent.)
Niels Christensen at Nordea Bank said it is difficult to find something negative for the euro, or at least not anything that’s in focus, and when there’s more optimism about the economy, suddenly there is a positive spiral for the euro.
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