Liquidity Driven Rally Set to Continue

Global risk sentiment has turned decisively more positive since December. In our view, this is clearly a result of the ECB’s much more accommodative stance on 8 December with, among other things, the introduction of the so-called 3-year LTRO.

The change in global risk sentiment from December has been clearly visible in the EMEA markets as well. As the graph  at the bottom of this page shows, we have seen a clear change in the direction of the EMEA currencies, and all of the EMEA currencies that we regularly do forecasts on have strengthened since 8 December. This, in our view, is not a coincidence. The ECB’s actions have significantly reduced the risk of a catastrophic event in the euro, which for very natural reasons is positive for the EMEA markets.

However, while the EMEA currencies were clearly trending stronger during DecemberJanuary, the picture has been less clear over the past month. Hence, since early February the EMEA currencies have overall traded sideways against the euro and the dollar. This is probably a reflection of the fact that the good news from the introduction of the 3-year LTRO now has been more or less fully priced in.

It is therefore now natural to ask the question whether it is time to turn more negative. In  our view, that is not the case as we think that the change in global monetary conditions will continue to lend support to the EMEA currency.

However, we also acknowledge that more monetary easing from the major central banks might not be forthcoming in the short term,  and furthermore, valuation of the EMEA currencies certainly looks less attractive than was the case in early December.

We therefore believe that the moderate bullish environment is likely to be maintained for the remainder of the year and,  in general,  have a fairly upbeat outlook for the EMEA currencies. However, we would stand ready to turn more negative on the EMEA currencies, especially if the ECB and Federal Reserve once again start to move in a less accommodative direction due to potentially higher inflation. There certainly is a risk that especially the ECB once again tightens monetary policy prematurely – as was the case in 2011. However, for now we think the ECB has learned  the  lesson and  will be less aggressive than for example in 2011.