FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, notes that the EUR found itself under pressure overnight as investors reacted to the horror of the weekend terror attacks in Paris. Key Quotes “Asian investors appeared to be following the logic that economic growth in France and potentially the wider Eurozone could be impacted by the threat of terrorism. However, selling the EUR in reaction to a rise in risk aversion is counter to the behaviour of investors in the summer months when the EUR was showing safe haven properties.” “The EUR is not a true safe haven. The EMU crisis may have retreated from the headlines but it is still working its way through the system. Last week’s collapse of the Portuguese government was a direct result of a popular push back against continued austerity. The general strike in Greece on November 12 was centred on the same theme.” “That said, the Eurozone does benefit from a large current account surplus. Additionally, the ECB is maintaining very low interest rates. We would argue that the combination of these two factors can generate the appearance of safe haven behaviour in the EUR. We also expect that these factors reduce the likelihood that the EUR will experience significant, lasting downside pressure on any rise in geopolitical risk.” “By maintaining very low interest rates the ECB has ensured that the EUR has evolved into the role of funding currency. In anticipation of the start of QE at the beginning of this year investors built hefty short positions in the EUR that resulted in a significant bout of downside pressure on the currency. During the summer months there was a rush to cover these shorts as risk appetite dwindled in response firstly to a rise in concerns surrounding Grexit and then but the bursting of the Chinese stock market bubble.” “As worries over the outlook for growth in the world’s second largest economy in addition to some other emerging markets rose, so did the broad based value of the EUR. We have argued that the first reason for the strength of the EUR this summer is that during times of uncertainty, current account surplus currencies have a tendency to find support, the second related reason is that the carry trades only operates widely when volatility is low and risk appetite is high. Risk appetite improved during October and this allowed for some resumption of downside pressure on EUR/USD as Fresh EUR shorts were generated. Even though the weekend terror attacks were targeted at the core of the Eurozone, it seems likely the EUR could find support on short covering.” “Almost irrespective of whether a rise in risk aversion brings some support for the EUR, the downtrend in EUR/USD last week was showing signs of exhaustion. In our view this was linked with concerns about the path of Fed rate hikes beyond the December FOMC given the fact that US price pressures remain moderate.” “Without a strengthening in US price pressures, it is possible that the market will temper its expectations of the trajectory of Fed rate hikes and this should contain the USD bulls. Consequently we remain of the view that parity may further away than it seems. We forecast EUR/USD1.05 in 3 mths.” For more information, read our latest forex news.