FXStreet (Delhi) – Research Team at NAB, suggests that in the current scenario, Euro’s status as a funding currency is likely to be enhanced.
Key Quotes
“Two factors relevant to this were firstly the somewhat surprising strengthening of the euro during the August/September China-driven market ructions, and then the emphatic signalling from ECB President Draghi following the 22 October ECB meeting that all options were to be considered by way of additional easing measures ahead of the 3 December Governing Council meeting.”
“On the former, what has become more evident in recent months is that the euro has usurped both the dollar and the yen as the pre-eminent funding currency for risk-taking investment activity. This is illustrated by the sharp rise in Eurozone banks’ external assets.”
“The moves by the ECB to set negative deposit rates last year, and then launch full-blown QE – have been key drivers of this trend. This in turn means that during periodic ‘risk-off’ episodes, the euro has benefited as investors have piled out of risky assets and repaid the funding currency.”
“This was amply demonstrated in the latter half of August when EUR/USD rallied more than five big figures. During such episodes and when capital flows temporarily contract, the euro-zone’s status as a large current account surplus region lends further support.”
(Market News Provided by FXstreet)