EUR: Positive sentiment with the improving Eurozone economy - Nomura

Analysts at Nomura are positive on EUR, with the improving Eurozone economy, large current account surplus (close to 3.5% of GDP) and expected shift by the ECB forming a supportive combination.

Key Quotes

“EUR is becoming more highly correlated to long-end interest rates and the move in term premium as the policy normalisation sequence approaches. This has been observed in EUR/AUD, with the correlation between the exchange rate and the Eurozone-Australian 20yr swap rate differential over the past month one of the highest since EUR’s inception, and the narrowing in the real GermanAustralia 10yr yield spread guiding EUR/AUD higher.” 

“In a similar vein, the upturn in the ECB “shadow short rate” – a theoretical measure that tries to reflect the effects of unconventional policy actions such as QE and forward guidance have had on the monetary policy stance – and less-negative spread to the RBA cash rate also illustrate EUR/AUD’s directional bias. As the ECB starts to normalise policy, and a greater term premium is attached, the ECB “shadow rate” should become less negative. Similar dynamics were observed in AUD/USD as Fed asset purchase tapering pushed up the equivalent US shadow rate.”