Eurozone set to be the winner in the ‘currency war’ this year, says AXA IM

23rd January 2015


The eurozone quantitative easing (QE) program means the euro area is set to ‘be the winner in the currency war’ this year, according to AXA Investment Management fund manger Jonathan Baltora.


Baltora, who is an inflation-linked bonds fund manager, said the European Central Bank (ECB) plan to buy public and private sector debt at £46 billion a month  has led investors to ask whether the plan will be successful in reviving inflation.


‘While the short-term inflation outlook has been heavily impacted by the collapse of oil prices, long-term inflation expectations have also been heavily trending down, raising some legitimate questions about the risks of deflation,’ he said.


Although he added that the effectiveness of QE is a ‘hotly debate topic’, he believes QE will boost GDP and inflation. However, the ‘currency wars’ theme is also something investors should be looking out for following a de-pegging of the Swiss france to the euro, cuts in Denmark and Canada and two Bank of England voters who were previously in favour of interest rate hikes now voting against.


‘In our view the ECB is trying to push real interest rates sharply into negative territory in the euro area,’ said Baltora.


‘In our outlook for the euro area inflation we see diverging forces, while oil prices and sluggish growth are headwinds – the first one feeding immediately lower inflation date, the latter being  a long-lasting force – the euro area stands to be a winner of the currency war over 2015 with a strong ECB QE program and a weaker euro.’


Baltora said central banks look set to remain ‘accommodative ‘ and therefore has a preference for ‘long real yields through inflation-linked bonds instead of break-evens’.


‘We concentrate our investments in inflation-linked bonds offering relatively higher real interest rates and have a preference for peripheral inflation-linked bonds,’ he said. ‘We favour European inflation-linked bonds over the US and UK for our portfolios.’



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