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- Foreign capital inflows are shielding the Euro

- Strong demand for Eurozone bonds from investors

- Lack of issuance in U.S. and weak stock market catalysts

Despite a string of poor economic data releases out of the Eurozone, the Euro continues to trade, unfazed against the U.S. Dollar at more-or-less its median level for the past 6-months.

At the time of EUR/USD is quoted at 1.1396, plum in the middle of a long-term range between roughly 1.12 and 1.15. What could explain this resilience in the single currency that has had to grapple with Italy falling into recession, and France and Germany avoiding recession by a whisker?

Granted, the U.S. Dollar has weakened over the past 6-months, but that does not explain the Euro’s resilience to the most recent stream of negative headlines since by then the U.S. Dollar had already depreciated.

The news that Eurozone Manufacturing PMIs fell into negative territory in February, that growth is expected to be only 1.3% in 2019 and rumours the European Central Bank (ECB) is anticipating a U-turn in its plans to withdraw the crutch of crisis-era monetary stimulus, all came out after the Dollar had mostly sold off but have still, nevertheless, had little impact on the Euro.

One explanation for the Euro’s surprising resilience is that it has been supported by continued strong interest from bond investors keen to put their money to work in the Eurozone, despite its faults, according to Ingvild Borgen Gjerde, a market analyst, at DNB Bank ASA.

And foreign capital inflows into long-dated debt in particular might just have risen keeping demand for the Euro resilient.

Long-maturity Eurozone sovereign bonds are of particular interest to Gjerde; 30-year sbonds from France, Italy, and Belgium, for example, have been particularly popular amongst investors.

Part of the reason is the lack of available stock of comparable investments from other countries such as the U.S. and Germany where treasury and bund issuance, especially of the longer-dated variety has fallen.

The ECB’s large holdings of German sovereign bonds also means that as they mature and the ECB reinvests the principal it quickly soaks up the available inventory of bunds, leaving less for the private investors.

With stock markets posing too much risk, investors hungry for the safety of bonds are looking to alternative markets, and it is here that Eurozone nations are finding eager backers.

“The recent issuance activity and strong investor demand for long-term bonds in the eurozone underscores two features. First, global demand for government bonds remains strong, despite risk assets rebounding so far in 2019. Second, as supply in the long-end remains limited in both the U.S. and Germany, investors seem to be gravitating towards semi-core government bonds in the eurozone. This suggests that although government lending in some eurozone countries is set to rise this year, and the ECB has ended its asset purchase programme, government yields in these countries will not necessarily rise significantly,” says Borgen.

Much of the demand appears to be coming from Japanese investors.

“Illustrating the strong demand for semi-core eurozone debt, data from the Japanese Ministry of Finance shows that Japanese investors were net buyers of French government bonds worth EUR17.5bn in the first 10 months of 2018. They sold a net amount of EUR5.5bn in German bonds in the same period, while Italian bonds attracted small, positive inflows. The allure of semi-core eurozone bonds to Japanese investors is obvious, as they offer better yields than equivalent German bonds, and investors’ hedging costs for euro investments are lower than for dollar investments,” says the DNB analyst.

The strong demand for semi-core Eurozone sovereign bonds means that those countries will benefit from cheap borrowing since high demand will keep borrowing costs (yields) low. This should have a net stimulative effect on the Eurozone similar to the effect of monetary easing, and so help support economic growth.

It may also explain why the ECB has been so slow to shift from its tightening stance despite the unceasing stream of negative economic data reports. The strong inflows are having a defacto easing effect on the region which it can discount, and therefore, remain relatively-speaking more hawkish, than it could otherwise. How far it can maintain its current stance is difficult to say but there are already signs it is having to shift to a looser stance, anyway.

The high capital inflows from outside the Eurozone also partly explain the continued high current account surplus in the Eurozone, and this has been posited as a reason for the Euro's stubborn resilience and positive forecast outlook for 2019.

Most recently analysts at Citibank argued that the Euro could rise to as high as the top of its range at 1.1570 in the short-term, and much higher - to 1.1800 and 1.1200 - in the medium-to-long-term as a result of its high current account surplus as well as further Dollar weakness.

“Despite the negativity in the Eurozone, an attempt to convincingly break lower in EURUSD fails and the pair still remained within the range starting from Oct 2018, which may imply EUR may have gradually reflected the negativity,” said Citibank in a weekly FX strategy note. “Eurozone current account surpluses, Chinese easing, and fading US growth outperformance may underpin EUR in the medium and long term.”

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