Political risk under-priced in EUR – Goldman Sachs

Research Team at Goldman Sachs, suggests that the UK referendum can have political implications for the Euro area.

Key Quotes

“So far, the market has treated the UK Leave vote as a local shock with global consequences only for bonds. Owing to the rise in support for anti-EU parties across Europe, the political risk of a less cohesive Euro area is another reason to remain bearish EUR. Since 2014, the EUR has traded as a safe haven currency when the source of the shock was far away from the continent (for example, the Euro appreciated during the 2008-2009 crises and more recently when China has been the source of market volatility), but not when concerns have originated in the Euro area.

The Euro fell not just during the 2012-2013 sovereign crisis, but also more recently – for example, ahead of European elections or on days when concerns about the periphery were elevated. In coming weeks, the re-do in Austria’s elections or developments in the Italian banking system are events that could put further downward pressure on the EUR.”