singaporeen
Unlocking value in the euro

Unlocking value in the euro

07-07-2020 | Monthly outlook
An EU stimulus program to recover from Covid-19 may be the catalyst for the euro to rise again, say Robeco’s multi-asset specialists.
  • Jeroen Blokland
    Jeroen
    Blokland
    Portfolio Manager
  • Peter van der Welle
    Peter
    van der Welle
    Multi-Asset Strategist

Speed read

  • EU plans EUR 750 billion ‘Next Generation’ recovery fund
  • Stimulus package may be the catalyst for euro strength
  • US economy faces bigger challenges in emerging from crisis

The EUR 750 billion package backed by European Commission bonds to help economies battered by the lockdowns could usher in greater fiscal integration, they say.

The biggest potential for resurgent euro strength may be against the US dollar, due to the weaker economic prospects across the Atlantic. This has prompted the multi-asset team to go long on the euro against the greenback.

“United by a common ‘enemy’, Europe is joining forces to recover from the Covid-19 economic fallout,” says strategist Peter van der Welle. “In doing so, it has likely triggered a catalyst to unlock the value in the common currency – the prospect of fiscal integration.”

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Showing new vigor

“On 18 May, the Franco-German axis showed new vigor with a proposal for a EUR 750 billion ’Next Generation EU’ recovery fund. A key element is that the European Commission will issue bonds on behalf of the EU to finance the recovery packages.”

“This will deliver non-negligible savings for EU countries that otherwise would have to pay higher yields on their lower-rated sovereign bonds compared to AAA-rated EU paper. Although it may not encompass genuine debt mutualization, it is nonetheless a promising step to further fiscal integration within the EU, and could be marked as ‘historic’ further down the road.”

“The announcement of the new recovery instrument fund seems to have been a catalyst for recent euro appreciation. The announcement coincided with an inflection point in the risk premium in the EUR/USD exchange rate, with market participants starting to demand a lower risk premium for having euro foreign currency exposure.”

Overshoots in the premium

The euro risk premium is defined as the part the of the EUR/USD exchange rate that is not explained by the 2-year interest rate differential between the US and Eurozone (see chart). “Swings in the euro risk premium can be sizeable, and they have the tendency to over or undershoot fundamentals over time,” says Van der Welle.
The euro risk premium is the part of the exchange rate unexplained by rate differentials. Source: Refinitiv Datastream, Robeco.

“In our view, the risk premium in the euro did overshoot at the end of March by approximately 10%, based on the 2-year rate differential. Only a catalyst to unlock this value was lacking. With progress being made in the negotiations around the recovery fund, we could be near another major inflection point for the euro risk premium.”

“While there is still debate among EU members, the overarching signal is that Europe may be finally getting its act together, requiring a lower risk premium for holding euro currency exposure.”

Europe versus the US

Meanwhile, the US is emerging from the coronavirus pandemic with more difficulty than Europe, which bodes well for the euro strengthening against the greenback, says Senior Portfolio Manager and Head of Multi-Asset Jeroen Blokland.

“The US is now the epicenter of the coronavirus in the developed world, while Europe is experiencing lower levels of unemployment, has better job protection, and has the advantage that Germany’s key trade links with China are a few months ahead of the US,” he says.

“An outperforming Eurozone manufacturing sector versus the rest of world has historically coincided with a stronger trade-weighted euro.”

Going long on EUR/USD

“We have implemented our positive view on the euro by going long against the US dollar. While we believe a decline in the risk premium will push the euro higher against most currencies, we particularly see upside against the US dollar.”

“The traditional driver of US dollar strength, the short-term interest rate differential between the 2-year government bond yield in the US and Germany, has greatly diminished. Historically, this differential has largely explained changes in the EUR/USD exchange rate.”

Relative attractiveness

“This differential has compressed massively during the last 18 months or so, falling from a historically large 3.50% to less than 0.90% now. This means that the relative attractiveness of the US dollar compared to the euro has declined.”

Another reason for potential dollar weakness is the US government’s budget. “Based on the latest projections, the US budget deficit will be significantly bigger than that of the Eurozone in the coming years (see chart),” Blokland says.

Following its own stimulus, the US now has a much higher budget deficit than the EU. Source: Bloomberg.

Beware the ‘twin deficit’

“In addition, the other major imbalance within the US economy, the trade deficit, may lead to further dollar weakness if investors start to ponder the ‘twin deficit’ again.”

Finally, US dollar weakness would also occur should further fiscal integration in the Eurozone result in the creation of so-called Eurobonds. “As these bonds represent the whole Eurozone, this new asset would likely have a higher yield than German government bonds, further reducing the yield gap with the US,” Blokland says.

“If Eurobonds are issued, a diversification of capital flows over low-risk assets would be possible, supporting the EUR/USD exchange rate.”

Important information

This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

Logo

Important Information

Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.

By clicking on "I agree", I declare that: 

  • I am a qualified investor as defined under 1
  • I have read and understood the Terms and Conditions and Disclaimers as described under 2

1 - This website may only be accessed directly or indirectly by the following persons in Singapore:

1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.

2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).

3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.

4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.

2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms.  If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore.  The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction.  It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights.  You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos.  You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video.  Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website.  You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason.  The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.

Disclaimers
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. 

Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice.  The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited.  By accessing to the Website, you agree to the foregoing.  

The funds referred to in the Website are for information only.  It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors.  The contents of the website is not reviewed by the MAS.  Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions.  You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.

Any decisions made based on the information contained in the Website are the sole responsibility of yours.  Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives.  The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.  

Investment involves risks and may lose value.  Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future.  The value of your investments may fluctuate.  Past performance is no indication of current or future performance.  The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future.  The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons.  The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes.  Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.

Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence.  An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

I Disagree