Sell Euro / Dollar says Nomura "It’s the Macro, Not the Macron"

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Euro exchange rates were bid in then wake of news that French President Emmanuel Macron had topped the first round of the presidential election, but this boost is already proving transient and one analyst says the Euro should be sold on a list of reasons.

Jordan Rochester, Global FX Strategist at Nomura, says he expects collapsing confidence in the Eurozone will likely weigh on euro portfolio flows further.

In short, the bigger macro economic picture matters more than politics and as a result the bloc's single currency is prone to further declines.

"For us it's the macro, not the Macron, that is driving the view," says Rochester in a note out this week. "Political uncertainty in France provides another reason why EUR is unlikely to trade well in the next two weeks, but it is not the only factor."

Collapsing Eurozone confidence will likely weigh on euro portfolio flows, and "real rates are not rising as fast as the U.S., while ETF inflows have dramatically slowed," says Rochester.

He says the European Central Bank (ECB) is not likely to raise rates faster than the U.S. Federal Reserve will, meaning bond yields will remain skewed in favour of the Dollar.

This acknowledges a view the ECB will indeed raise interest rates, but there is a risk that "the ECB will probably not validate the July pricing of a potential rate hike just yet".

The call comes ahead of Thursday's ECB meeting where policy makers will likely acknowledge surging inflation but sound caution over the hit to economic growth posed by the Russian invasion of Ukraine.

Nomura meanwhile notes investor positioning is not short Euro, despite the Euro to Dollar exchange rate trading near its lowest levels since May 2020. (Set your EUR/USD rate alert here).

"It’s actually net long EUR and quite surprising," says Rochester.

Often when positioning on a currency is heavily biased in one direction or the other a counter-trend can occur as positioning is inevitably required to rebalance.

But a more fundamental headwind has grown in that the eurozone’s trade balance has worsened markedly as the cost of imports rises and exports struggle in a tough global economy.

"This will likely have a big impact on flows. A fresh round of EU sanctions on Russia and moves to secure energy supplies from elsewhere suggest it will be awhile before a return to normal, and energy prices are likely to remain elevated for some time," says Rochester.

Rochester says although China's credit impulse may be improving (China is an important market for Eurozone exports), the feed-through will take time and the conflict between Russia and Ukraine is a bigger factor for Eurozone growth for now.

Nomura hold a strategy recommendation to be 'short' the Euro-Dollar.