Spill-overs from EZ politics into G10 and EM FX - ING

Petr Krpata, Chief EMEA FX and IR Strategist at ING, suggests that with the start of the busy EZ political calendar less than one month away (starting with Dutch elections next month followed by the two rounds of French Presidential elections and Italian PD ruling party leadership contest) there are going to be spill-overs from EZ politics in G10 and EM FX – a theme that is likely to gain more traction in coming weeks/months and should exert persistent influence on FX markets.

Key Quotes

“In our view, the concerns about EZ politics will affect world currencies in two ways:

• The first order effect - relates to direct EZ spill-overs in global FX. We measure this by looking at countries’ exports to EZ as percentage of total exports (direct EZ trade links) and the currencies’ performance during meaningful spikes in EZ risk, gauged by peripheral spreads (direct EZ risk channel).
• The second order effect - relates to secondary spill-overs from EZ specific risks into global risk sentiment as well as indirect growth spill-overs to the rest of the world. As potential market concerns about the future of the EZ won’t be contained to EZ only, even those currencies less directly linked to EZ may be affected if the global market sentiment is dented. To measure the secondary effects, we look at various countries’ openness of the economy and sensitivities to global risk sentiment (general risk channel).”