Politics to keep EUR soft in 1H17 – ING

Petr Krpata, Chief EMEA FX and IR Strategist at ING, suggests that with regards to Eurozone political risk premium, the victory of anti-establishment forces compel participants to treat the very busy Eurozone calendar with greater caution, at least until the outcome of French Presidential elections (the second round scheduled for May 2017).

Key Quotes

“The risk premium is already reflected in EUR/USD spot as well as in the options market, with tenors covering the key political risk events pencilling in: (1) higher implied volatility; and (2) a higher volatility premium. Coupled with the potential for another leg of UST yields overshoot in 1Q17, all this points to a downside risk for EUR/USD. We expect the cross to potentially move towards parity in 1H17.”

“While EUR could struggle for most of 1H17 due to political risk, we don’t look for a 2010-12 style collapse (as was the case during the Greek crisis). Compared with that period, EUR looks less vulnerable. First, the ECB has strong credibility under President Draghi to “do whatever it takes” to save the euro – Draghi’s so far unused OMT programme. This in turn raises the bar for market participants to enter into speculative shorts (the resilient EUR price action during the 2015 Greek crisis provided a case in point). Second, the EUR is currently materially undervalued compared with its overvaluation back in 2010, making it more difficult for the currency to decline. While more resilient than in 2010, this still does not mean the EUR is entirely immune. It is not, hence we see some modest downside in 1Q17.”