Synopsis:

CIBC expects a gradual increase in EUR holdings by global reserve managers, driven by Europe’s relative macro stability, stronger sentiment data, and strategic diversification away from the USD. While the ECB may get uneasy about the pace of EUR appreciation, the single currency remains cheap vs relative fair value, reinforcing a constructive medium-term outlook.

Key Points:

• Stronger Macro and Sentiment:
  • Germany’s business and investor expectations have improved notably, providing fundamental support for the EUR.
  • ECB President Lagarde’s “global euro moment” remark underlines Europe’s push to expand the euro’s international role.

• Reserve Diversification Tailwind:
  • CIBC expects passive diversification to gradually shift global FX reserves toward the EUR, reflecting reduced confidence in the US as a reliable trade and defence partner.
  • No immediate large-scale USD selling is expected, but the steady reallocation trend will underpin EUR demand.

• Relative Valuation Still Attractive:
  • CIBC sees the EUR as still on the cheap side, with a fair value estimate closer to €1.30, leaving upside room.
  • Some ECB policymakers may become concerned about excessive strength, but medium-run factors outweigh that risk for now.

Conclusion:

CIBC believes a structural uptick in EUR reserve allocations will support steady EUR gains over the medium term. Combined with robust macro fundamentals and strategic EU positioning, the single currency remains undervalued and well-placed for further appreciation, even if the ECB tries to temper the pace.