Oliver Harvey, Macro Strategist at Deutsche Bank, explains that regime change has been a feature of FX markets this year, for example, the beta between EUR/USD and interest rate differentials has collapsed.
Key Quotes
“One reason is that shifts in asset allocation have reduced the exchange rate sensitivity to monetary policy. And nowhere is there clearer evidence than the M&A market.”
“M&A inflows into the Eurozone versus the US have soared to the highest level since the mid-2000s and are showing little sign of slowing down. Our latest report shows USD 32bn worth of outflows from the US in the last three months and USD 13bn of inflows to the Euro Area. M&A flows have clearly been an important factor behind EUR/USD strength this year.”
“How long can the euro M&A party last? Growth and valuations will both be important factors here, but it's worth noting that M&A trends can be quite persistent. In the early 2000s, dollar negative outflows flows lasted for several years, while M&A outflows from the Euro Area persisted through most of the post-crisis period, before turning positive this year. Moreover, deal-making activity between the US and Euro Area diverged sharply since the financial crisis and the latter has only slowly begun to catch up, which doesn't suggest the European market is exhausted just yet.”
“In other major currencies, Japan has experienced three consecutive years of M&A outflows but these are starting to slow notably. The UK has seen flat M&A flows this year, after modest ones in 2016 and huge inflows in 2015, suggesting Brexit has been weighing on foreign investment decisions. Australian M&A inflows, which were supportive in 2016 and 2015, are more disappointing this year. Canada continues to see large outflows.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.