Traders buying more euro as they bet big on growth

By Katherine Greifeld & Anooja Debnath

When the going gets tough, traders are increasingly buying the euro these days.

Europe’s common currency, which just a few years ago was almost a byword for political instability and faced threats to its very existence, is now attracting buyers at times when risk assets around the world are being sold. Part of that is due to haven flows and investors unwinding carry trades. But it also reflects a market that is increasingly upbeat about growth and inflation in Europe even as central bankers remain reticent about dialling back stimulus.

"Europe is becoming an attractive destination to put your money to work," said Viraj Patel, a London-based currency strategist at ING Groep. "This is certainly the case for medium-term real money investors, who are more sensitive to broader political trends and cyclical economic stories."

While investors aren’t pricing any rate hikes by the European Central Bank until at least 2019, strategists say it’s becoming harder to ignore the continent’s improving macroeconomic backdrop when looking at the euro against its peers.

With European interest rates still hovering near record lows, the shared currency has yet to decisively break above the key $1.20 level. But behind its recent bouts of strength lies the realization that the ECB may start running out of excuses to maintain its stimulus.

Policy makers may be coming around to that view as well. ECB’s Mario Draghi said that wage growth should start to pick up, helping push inflation back toward the central bank’s goal of close to 2 percent. Draghi’s comments followed remarks from executive board member Yves Mersch, who said markets wouldn’t be right to expect another extension of asset purchases after September 2018.

Relative safety

The euro rallied as global equities took a battering earlier this week and is on track for its strongest weekly gain since September 8. It’s risen more than 1 per cent since last Friday and stood at $1.1795 as of 10 am in New York.

The average forecast in a Bloomberg survey of analysts is for the common currency to appreciate to $1.22 next year and $1.25 in 2019. Goldman Sachs predicts that the euro will advance to $1.20 in the coming 12 months and says that the portfolio shifts that have driven strength in the currency this year have "more room to run."

A surplus in the region’s current account, the broadest measure of trade and services, underpins the euro’s haven appeal, according to Vassili Serebriakov, an FX strategist at Credit Agricole. "The euro does perform fairly well in riskoff environments," he said.

Increased political stability also helps. Risks posed by events such as this year’s French elections are largely in the rear-view mirror for Europe, and the market impact of unexpected disturbances such as the ructions in Catalonia have been relatively muted.