Despite statements to the contrary, the euro, at current levels around $1.3600, is not all that “crazy” and instead reflects global investor flows in recent months rather than pure interest rate differentials which favor the dollar, analysts said.
They were responding Tuesday to an article in the Financial Times, which quoted the chief executive of Airbus’s passenger jet business, Fabrice Bregier, stating that the European Central Bank should intervene to push the euro lower versus the dollar, from current “excessive” or “crazy” levels over $1.3000 to more business friendly levels in the $1.2000 to $1.2500 zone.
To offer a bit of perspective, the euro has traded in a $1.3477 (Feb. 3) to $1.3993 (June, 8 ) in 2014, quite a tight range compared to prior years.
The euro closed at $1.4569 Dec 31 2007, as the global financial crisis was starting. The pair hit a life-time high around $1.6038 in mid July 2008, just two months before Lehman Brothers declared bankruptcy in September. The euro was trading at $1.2330 by the end of October 2008.
The euro managed to rally to $1.5144 in November 2009, only to fall to $1.1877 in June 2010, as the market responded to the unfolding Greek crisis that soon broadened to include other peripherals.
May 2011 saw a new run-up, this time to $1.4940, but the widening sovereign debt crisis again weighed and the euro was soon again on its backfoot and remained so until July 2012, when it bottomed $1.2043.
Subsequently, EMU fiscal action and starker ECB easing measures have made global investors feel more comfortable moving monies back to eurozone investments.
As evidence, BOA Merrill Lynch’s monthly fund manager survey, taken June 6-12 and released June 17, showed that a net 43% of those polled were overweight eurozone equities, the second highest reading since July 2007.
Global investors have also been pouring into eurozone bonds, especially peripheral bonds, with Spanish 10-year yields hitting fresh record lows in June, in the wake of the ECB’s announcement of further more substantive easing measures.
The euro topped out just shy of $1.4000 May 8 after ECB President Mario Draghi promised future easing action, and fell to a low of $1.3503 the day of the June 5 ECB decision.
Since then, the pair has held a $1.3500 to $1.3700 range. Traders maintained that this range will have to break for momentum in either direction to mount.
They were hard pressed to see what would cause the euro to break out of the current larger range – certainly not some eurozone exporter trying to jawbone the currency lower.
While Airbus’s Bregier’s currency centric comments “will resonate with many eurozone exporters,” the ECB is in the driver’s seat, said Bob Lynch, senior currency strategist at HSBC.
“The ECB is also concerned about the EUR, but they view it from a somewhat different perspective, one of its impact on monetary conditions and pressuring inflation lower, rather than its outright impact on competitiveness,” he said.
“Nonetheless, with the EUR continuing to hold at reasonably high levels, and not all that much lower than when ECB President Draghi first hinted at more easing in early-May (roughly 1.3900), the pressure to take more action against the currency persists,” he said.
This pressure “would be compounded” if other large Eurozone corporates begin to more publicly voice concern about euro strength, Lynch said.
CIBC economists acknowledged that the euro has been “stubbornly resilient,” but explained that “much of that is a function of a lackluster USD performance into the end of Q2, with the euro on a trade-weighted basis seeing a substantial move lower since May.”
“That is in line with the market anticipating easier monetary policy, expressed in part with an increase in the currency’s short bias over the last two months,” they said.
CFTC data, released Monday for positions as per July 1, showed that speculative accounts had a net euro short of -60,776 contracts versus -57,503 contracts the week prior. Net euro shorts have been over 50,000 contracts since June 10, after the ECB meeting.
Positions over 100,000 contracts are typically viewed as extended, so current positions are not yet seem as extreme, traders said.
CIBC reminded that the ECB may not be done in terms of easing and that beyond the SMP purchases, unsterilized QE was also offered up as a possibility.
“While none of these measures will do much on the interest rate front, when contrasted against rising chatter for Fed tightening, ECB easing measures could provide stimulus through the currency channel,” the economists said.
“Indeed, with inflationary pressures remaining elusive, private sector credit growth anemic, and growth running only marginally above potential in our forecast, a weaker euro to underpin a stronger recovery and lift depressed expectations is as needed as ever,” they said.
However, for the euro to move markedly lower, the market will need evidence that the dollar and U.S. Treasury yields are truly poised to rise, they said.
“If U.S. growth sustains a strong pace in Q3 as we expect, the contrast in monetary policy expectations vs. Europe should underpin a cheaper euro in the second half of the year, seeing the EURUSD end the year at $1.28,” the economists said.
Longer term however, the firmer status of the Eurozone current account would suggest that “the upcoming period of euro weakness will not be sustained,” they said.
The latest eurozone international trade data for April, released June 13, showed a E15.7 billion surplus for the month (EA18), versus $16.7 billion in March. EA28 showed a E1.3 billion surplus versus E4.1 billion in March.
“The EU28 deficit for energy decreased (-E86.8bn in January-March 2014 compared with -E95.8bn in January- March 2013), as did the surplus for machinery and vehicles (+E58.1bn compared with +E65.3bn),” Eurostat said.
“The highest increase in EU28 exports was registered with China (+11% in January-March 2014 compared with January-March 2013) and the highest increases in EU28 imports with South Korea (+13%), Switzerland (+7%) and Turkey (+6%). The most notable decrease s were recorded for exports to Russia (-11%) and Switzerland (-9%), and for imports from Russia (-10%) and Brazil (-8%),” the report said.
In a June 26 release, Eurostat noted that the EU international trade inservices has increased significantly in the last decade.
“EU exports of services to the rest of the world rose from E367 billion in 2004 to E684 bn in 2013 , while imports increased from E321 bn to E11 bn. Since exports have risen more strongly than imports, the trade surplus has almost quadrupled between 2004 and 2013, from E45 bn to E173 bn,” Eurostat said.