EUR to be more resilient this time around – ING

While the busy EZ political calendar should weigh on EUR/USD in coming months and potentially briefly push EUR/USD towards parity, Petr Krpata, Chief EMEA FX and IR Strategist at ING expects the EUR downside driven by concerns about the EZ political outcomes to be more limited compared to the crisis years of 2010-12.

Key Quotes

“Contributing factors include:

• ECB credibility: The ECB managed to partly mute/isolate the spill overs from increased periods of EZ risk into the currency as market participants currently believe that the ECB is ready to do “whatever it takes” to save the euro. The existence of programmes such as OMT helped to cement the ECB’s credibility. Hence, EUR/USD spot may not the best vehicle how to express trade on European risk. 
• Diminished EUR sensitivity to EZ risk: ECB credibility is reflected in diminishing sensitivity of EUR to peripheral spreads, both currently and during the recent bouts of EZ political risk (Greek crisis in summer 2015 and concerns about Italian banking sector in 4Q16). The former shows that the current EUR/USD sensitivity to various EZ sovereign spreads (both core and periphery) tend to be nowhere near the EZ crisis levels. The latter shows that limited EUR sensitivity and negative spillovers to the two more recent periods of peripheral concerns.
• Material EUR undervaluation: Following its collapse in late 2014/early 2015, EUR/USD looks significantly undervalued. This materially increases the bar for a further pronounced EUR decline and poses an obstacle to a large scale EUR fall. This contrasts with the 2010-13 period, when EUR/USD was either fairly-valued or over-valued on a mediumterm basis. Should EUR/USD push towards parity, the under-valuation would be worth a remarkable 20%.”

“Hence, EUR/USD spot may not the most desirable investment vehicle how to express European political risk and EUR may be more resilient than during the prime crisis years of 2010-12. The bar for a persistent break below EUR/USD parity thus seems very high in our opinion.”