SINGAPORE (Feb 9): Europe’s political risks are set to rise as far-right leader Marine Le Pen continues to gain ground ahead of April's French elections and the International Monetary Fund remains divided over the terms of the Greek bailout.

But Sim Moh Siong, senior currency strategist at Bank of Singapore, does not think buying the Euro would be an effective hedge against these growing risks as the EUR/USD currency pair is unlikely to move below parity.

“The EUR/USD is trapped between improving macro fundamentals fuelling early ECB (European Central Bank) tapering fears as well Trump’s currency politics and, on the other, enlarging tail risks such as European political risk,” said Sim in a note on Thursday.

As Sim explains it, growing inflation in the Eurozone continues to strike fear in markets that the ECB might bring forward its QE tapering from April. In fact, Europe has grown alongside the US.

“We believe the ECB will hold the line on its current QE plan and continue to push back against fears of an early taper with a consistently dovish message as Draghi delivered again in his European parliament testimony recently,” said Sim.

Meanwhile, the Trump administration’s constant emphasis on a weak US dollar and greater trade protectionism to improve the US manufacturing sector is another reason not to buy the EUR-USD currency pair.

Instead, Sim recommends selling the EUR against the CHF, SEK and NOK, for a more effective hedge. He also recommends buying gold and JPY as “a good portfolio diversifier or hedge or insurance policy against more generalised risk correction.”

He believes the risk of a Eurozone break up would be unlikely to upset the ongoing Eurozone growth recovery, so the SEK and NOK would continue to be supported. Furthermore, he points out that there is a good chance the CHF can “further strengthen against the EUR as European political risk lingers”.

“The CHF will act as a proxy for the old Deutsche mark – a safe haven in Europe. Furthermore, Switzerland is on the US Treasury's FX manipulation watch list. The risk of being formally termed a currency manipulator by the US may further weaken the Swiss National Bank’s commitment to keep engaging in frequent intervention to support EUR-CHF,” concluded Sim.