Euro inclined to appreciate in long run

Equity investors had increased their holdings of EUR equities on FX hedged basis when divergence of monetary policy had begun by mid-2014. The investors had also hedged present EUR equities holdings. This implies that peak flows might have taken place, showing an inclination of the EUR to appreciate. This development is also helped by valuation and correlation concerns. At present the currency is lower than the usual average of 1.18, while mean-reversion believers should think of a slightly stronger Euro in long run. Moreover, over the past year, the belief that the currency appreciates when stock markets rise and vice-versa has been proved wrong.

ETF flow statistics show that investors are not hedging new equity inflows anymore and are rather leaving their EUR exposure open. On a broader basis, the EUR will perform well. The European Central Bank might have bigger issues in containing the currency, stimulating them to take the measures undertaken by Riksbank and combat against EUR for sake of inflation.