EUR/USD gains as hedging costs drop sharply – ING

EUR/USD advanced in Asia as sharply lower USD hedging costs for eurozone investors—now down to 1.85% from 2.40%—boosted demand for the single currency alongside improved terms of trade. With eurozone investors holding over €2.3tr in U.S. debt, even modest hedge-ratio increases could generate meaningful dollar selling, supporting the pair's push toward the 1.1655–1.17 resistance zone, ING's FX analyst Chris Turner notes.

Eurozone terms of trade hit year high on softer energy

"EUR/USD found a bid in Asia on the Hassett news. In the background, however, there is some more supporting evidence for the rally. Softer energy prices are sending the eurozone's terms of trade to the highest levels of the year and supporting the eurozone's external accounts. And perhaps more importantly, hedging costs for eurozone residents wanting to insure against FX losses on US assets have now dropped to 1.85% p.a. when looking at the three-month forwards. These had been at 2.40% in July."

"While a 55bp drop in hedging costs might not seem like a lot, it is a big deal for bond investors who typically deal in more conservative returns. And for reference, at the end of the second quarter this year, eurozone investors held about €800bn of US sovereign debt and €1.5tr of other US debt securities. Therefore, some modest increase in hedge ratios can lead to quite a supply of dollars. Over the next couple of weeks, we should probably look out for buy-side dollar selling at key FX fixes."

"In Europe, the focus remains very much on the Ukraine peace talks. Unsurprisingly, there seems to have been little progress in US-Russian talks yesterday. The focus today could be on the European Commission's proposal to use frozen Russian assets to fund Ukraine. Political analysts widely feel that this loan is essential to fund Ukraine's ability to defend itself after the second quarter of next year. If EUR/USD can nudge through the 1.1655/70 area – perhaps with the help of some softer US data – we could see a decent move through 1.17. We retain a year-end target of 1.18."