Euro breakup risk falls to 5-year low in butterfly

Euro’s Advance

The shared currency has appreciated 4.1% over the past three months and 7.2% over the past six, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. It has climbed more than 10% on a trade-weighted basis since Draghi’s pledge in July.

Draghi spurred gains in the euro last month when he spoke of “positive contagion” in financial markets and a return to economic growth later this year. The ECB cut its benchmark rate to a record low of 0.75% in July.

“Concerns of a break-up of the single currency and general global economic concerns have eased,” Alan Wilde, head of fixed-income and currencies in London at Baring Asset Management, which oversees $53 billion, said in a telephone interview on Feb. 14. “Some of these tail risks have dissipated as actions have been taken and markets have gained more confidence.”

The gross domestic product-weighted average of 10-year government bond yields in Italy, Spain and Portugal has collapsed since July. That narrowed their premium to rates in seven AAA rated countries outside the currency bloc to 2.54 percentage points, close to the least since July 2011.

Allocation Moderating

Australia, Canada, Denmark, Norway, Singapore, Sweden and Switzerland have top AAA grades and stable outlooks from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings.

The currencies of Canada, Australia and Singapore have tumbled against the euro by as much as 9.6% in the past six months. Denmark’s krone is linked to the shared currency. Finland, another top-rated nation, is in the euro bloc.

“Capital was flowing out of the euro zone -- some went to the Swiss franc obviously, some went into other currencies like the Australian dollar,” said Andrew Salter, a foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “That allocation is now moderating” as the ECB has stepped behind the peripheral-bond markets.

Bond Buying

Since the ECB made its unlimited bond-buying proposal, peripheral-debt yields have retreated even though no euro members have yet taken up the central bank’s offer, which grants support for countries that sign up to economic reforms.

Net portfolio investment in Spain climbed for a fourth month in November to reach the highest since May 2006.

“I’m long on the euro and short on the Australian dollar,” said Akira Takei, head of the international fixed- income department in Tokyo at Mizuho Asset Management Co., which oversees about $35 billion. “The ECB has made it clear that it won’t let its member states default on their debt.”

Takei said he holds more Italian and Spanish notes than his benchmark index and sees the euro strengthening to $1.42 this year. The median estimate of analysts surveyed by Bloomberg is for the euro to end this year at $1.31. The shared currency gained 0.3% to $1.3387 at 12:49 p.m. in New York.

Draghi told reporters on Feb. 7 the euro’s appreciation is a sign that confidence has returned to the currency. While the exchange rate isn’t a policy target, it is “important for growth and price stability,” he said.

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