Finally, the euro has surged higher - Nomura

Analysts at Nomura explained that it’s been a waiting game in recent weeks, but finally, the euro has surged higher. 

Key Quotes:

"Naturally it was the ECB that was the trigger thanks to President Draghi’s hawkish comments. This all fits into our bullish euro view of a broad-based recovery in the euro area, likely ECB tapering this year and a strong current account surplus. The big test will be whether the euro breaches and stays above 1.15 – the top end of its two-year range. We think it will.

But while the strong euro story seems easy to understand, what is often neglected is that it also reflects a weak dollar story. In a world where the Fed was the only tightening central bank, valuations were still not stretched and growth was stronger than elsewhere, dollar strength was compelling. That world ended at the start of this year. Since then dollar valuation has been stretched, which the IMF agrees with, the rest of the world is catching up in terms of both growth and reversing earlier easing measures, and the US current account deficit is growing. This latter point is not lost on the US administration, which has through various means adopted a weak dollar policy. The result is that even though the Fed has now hiked four times, to make the dollar the third-highest yielding currency among G10 currencies, the dollar has routinely been in the bottom half of the performance table among both G10 and EM currencies.

The other crucial point is that euro strength is partly a response to expectations of ECB tapering. This comes on top of the Fed’s apparent set path to reduce the size of its balance sheet through “quantitative tightening”. Meanwhile, Chinese authorities have been tightening policy and clamping down on excesses in the financial sector. This triple threat to global liquidity will likely remove a key underpinning of risk markets, whether FX carry trades or credit/equity markets. Already, our cross-market risk indicator has moved firmly away from “risk seeking”. It still has more ground to cover before it signals “risk aversion”, but the trend is worth noting. Because of this, we would be hesitant to sell JPY even though the BOJ is not hiking anytime soon. In fact, given our dollar view, we think USD/JPY could decline in the months ahead."