The very unusual step to meet outside of their regular meeting cycle is an encouraging sign that the ECB finally takes the situation seriously. Unfortunately, the announcement was light on details. In our view, PEPP reinvestments alone are insufficient to cap sovereign spread widening in a global monetary tightening cycle. The risks to the EUR outlook are not limited to sovereign spreads โ EUR is down today despite tightening spreads โ as the worsening economic outlook in the eurozone may generate a widening growth differential with the US that may negatively impact equity flows into the region. Incidentally, EUR/USD may continue to see limited upside potential on the back of dollar strength. Overall, the positive impact on spreads from the announcement of new tools does not change our view that EUR/USD will stay anchored around 1.0500 during the summer months. EUR/CHF would normally be a better mirror of how peripheral spreads impact the FX market. Historically, the correlation between EUR/CHF and the 10Y BTP-Bund spread tends to peak when the spread breaks the 200bp level (chart below), as markets see debt-sustainability risks rise. We have seen some stronger correlation lately but not as marked as in previous instances. We now favour EUR/CHF lower over the next year (target 1.00) as the SNB keeps the real CHF stable by engineering nominal CHF appreciation โ probably at around 4% per annum to offset Switzerlandโs low inflation relative to trading partners.
- ING FX Strategy
*Dated 06/15/2022:
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