Equity and M&A flows supporting euro, but downside likely ahead – Nomura

FXStreet (Barcelona) - FX Strategists at Nomura note that going ahead fixed income flows will regain a upper-hand against the equity and M&A flows into euro, further suggesting to short EUR/JPY.

Key Quotes

“Unprecedented stimulus by the ECB has caused eurozone bond yields to fall to historically low levels and equity markets to power higher. The euro has suffered on the back of this, predominantly through fixed income outflows over the past few months. But there have been counterbalancing forces as well, keeping the euro from falling even more substantially.”

“In recent weeks, the euro has had more two-way movement. This has been due partly to changes in Fed communications (in relation to EURUSD), and the recovery of commodity prices in some other crosses. But we also think counterbalancing flow forces are playing a role in stabilizing the euro to some degree.”

“The big picture is that equity and M&A flows are starting to support the euro, while fixed income flows, from private and official sources, continue to put downward pressure on the single currency.”

“Our baseline remains that fixed income flows will retain the upper hand going forward. From a positioning perspective, our latest view has been for a “grind lower” or a volatile selling environment. Specifically, we have positioned ourselves short EUR against JPY and USD, but writing covered puts.”