Euro’s Revival May Be a Positive Sign for Risk Everywhere

(Bloomberg) -- Europe's common currency is signaling a broader shift in risk appetite may be afoot.

The euro climbed to its highest against the Swiss franc since January on Tuesday, a notable change in direction for a currency pair that, weighed down by concerns about the coronavirus pandemic and Italy's debt load, has spent most of this year sliding. Meanwhile, the correlation between the common currency and European equities is now at its strongest levels since October 2018.

With several analysts calling the euro a proxy for global growth, stimulus measures from around the world -- not just in Europe -- could help its cause.

Recovery expectations have risen after a chorus of central bankers called for more fiscal action. Japan's central bank boss issued a rare joint statement with the country's finance minister to reassure investors that yields won't rise, while the nation has doubled down on its stimulus measures. Key Federal Reserve official John Williams has said more fiscal support is needed also in the U.S., where government officials are working on details for additional aid. And a similar tone has been adopted by policy makers from South Korea to Australia.

In light of these moves, growth and inflation expectations have the potential to shift rapidly, further dampening the appeal of haven assets such as the Swiss franc.

John Velis, a strategist at Bank of New York, said the shared currency may have more upside as investors slow the pace of outflows and add exposure. Canadian Imperial Bank of Commerce's Bipan Rai, meanwhile, has recommended options strategies that would benefit from a rapid weakening of the franc.

Also, the MSCI World index has advanced in the past two weeks, touching its 200-day moving average for the first time since March, indicating an increase in risk appetite.

The 30-day correlation between the Bloomberg euro index and the STOXX Europe 600 index is strongest since October 2018, compared with early March when it was negative.

Of course, it's possible that investor sentiment may sour in the weeks ahead if there is a significant increase in the number of virus cases, or if there are further strains in the U.S.-China relationship. But traders also have a slew of central bank policy announcements to look forward to, including one this week from the euro area's, which could give scope for a further boost to optimism.