EUR: Don’t underestimate the importance of rising EZ investment activity - ING

Analysts at ING suggest that investment has been a surprise engine of growth for the Eurozone in 2017, as broadening innovations are helping to foster a structural transition in the economy.

Key Quotes

 “Market analysts can (at times) be guilty of overlooking the significance of such structural shifts, often failing to make the connection between these changes and long-run variables – such as the equilibrium interest rate. In fact, the move higher in EUR/USD since summer 2017 can to some degree be attributed to this relative structural adjustment in the EZ economy.”

“The convergence in EZ and US neutral interest rate estimates (r*) captures this conceptually; this gap has narrowed by 45bps since 4Q16, and currently stands at 19bps (according to Holston-Laubach-Williams data). Given that this suggests that there’s not a lot of difference between terminal policy rates in the US and EZ now, it’s no surprise to us that EUR/$ – albeit with a lag – has snapped back higher in 2H17. And with the ECB’s monetary normalisation cycle in its infant stages (relative to the Fed’s), we believe that such structural re-pricing in markets still has some legs to run. EZ investment data will be worth keeping an eye on – with today’s German ZEW survey a good starting place.”