Safe-havens less attractive as tail-risks decline?

For the past two years most attention on financial markets has concentrated on the European economic outlook and its associated political and economic risks. As we discussed in last January’s Currency Strategy (“Reduced tail-risks lessen safe haven attractiveness”) the ECB’s introduction of the Outright Monetary Transactions program a year ago has reduced financial risk premiums on several European financial assets. This we suggested might decrease demand for so called safe-haven investments such as the Swedish krona. Lately with signs of growth returning to the Euro-zone, risk premiums have continued to decrease as shown by both intra-EMU bond spreads and the ITRAX. Long-term political risks in Europe remain, given the region’s insufficient economic integration to promote the EMU as an optimal currency area. Nevertheless, with US bonds being sold off and the Bank of Japan doing its best to weaken the JPY, global investors may continue to be attracted by still relatively inexpensive European assets. Further, austerity programs and the OMT have helped substantially improve both the EMU current account and foreign portfolio flows. Latest global bond and equity flow data (EPFR) clearly show global investors’ appetite for EU assets. This is one of two key SEKrisks (the other being the much more remote possibility of falling house prices in Sweden) which may force SEK bulls to reconsider their bullish outlook during the coming months. In the longer term, we still expect the SEK to continue to appreciate vs. EUR.

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