BNY's Geoff Yu highlights a notable decoupling between Euro (EUR) asset flows and the currency itself, as the European Central Bank (ECB) pivots its policy focus back toward growth [1]. Yu observes that while EUR exposures are at their highest levels since 2024, this is primarily due to a sharp decline in hedge ratios, even as equity and bond ownership remains subdued [1]. Specifically, current EUR hedges are at 0.6 times the rolling 12-month average, marking the lowest level in the tracking period from 2024 onwards [1]. Meanwhile, equity holdings are less than 2% above the rolling 12-month average, and sovereign bond holdings are 2% below, placing them at the 27th and 25th percentiles, respectively [1].
Yu notes that the EUR is maintaining its value ahead of the ECB decision, with tentative signs of recovery in the Eurozone economy [1]. He argues that a pro-growth message from the ECB would be more beneficial to the Eurozone economy, and that recent Governing Council rhetoric is shifting in this direction, with some exceptions [1]. However, Yu remains cautious about pursuing outright EUR gains, emphasizing that the recent surge in net EUR exposures is rare and largely driven by unwinding of EUR holdings relative to portfolio changes [1].
The ECB is not expected to favor a significantly weaker EUR, given that residual inflation remains high [1]. Any policy easing is likely to be targeted at credit conditions rather than a broad-based weakening of the currency [1]. Additionally, concerns from the German government regarding CNH valuations suggest apprehension about potential shocks from China [1].
According to BNY's iFlow data, the current strength in EUR holdings is mainly due to buying on the crosses (excluding EUR/GBP) following the ECB's recent rate hike [1]. Yu anticipates that an ECB policy pullback will support Eurozone assets and lead to a rebuilding of currency hedges, rather than a sustained rally in the EUR itself [1]. Despite a more cautious growth outlook, the EUR has not experienced a significant decline, indicating that holdings remain robust [1].
CONCLUSION
The decoupling of Euro asset flows from the currency reflects shifting investor behavior as the ECB signals a move toward growth-oriented policies. While EUR exposures are elevated due to reduced hedging, actual asset ownership remains modest. Market participants are expected to benefit more from Eurozone asset appreciation than from a sustained EUR rally, with hedge ratios likely to increase as ECB policy evolves.