martedì 30 giugno 2009

Top strategists are looking for a fall in the euro against the US Dollar in H2 09, but we would not count on it

In our previous post How long will the Eurozone (and the ECB) cohabit with an overvalued Euro? 1) Why the euro’s fall is key for the Eurozone economy... we have highlighted how a devaluation of the Euro is the only possible source of growth for the Eurozone economy, at least in the short term. Indeed, a fall of the Euro is likely to have an immediate positive effect both on the countries running a strong current account deficit (i.e. Spain and Ireland) and on the countries with a high dependence on exports (i.e. Germany), even if the latter should be penalised by a slowdown in international trade.
History has clearly shown that a devaluation of the national currency is crucial to overcome a downturn. At the time of the Great Depression, the UK and Japan were the first countries to devalue their national currencies against the Gold (in September and December 1931 respectively) and enjoyed a milder recession than the US.
The Swiss have already expressed a desire to weaken the national currency. We believe that British Pound and US Dollar devaluation against the Euro in the last few months has not been seen as a “threat” by the UK and US Central Banks and Governments.
Nevertheless, this Euro uptrend may be close to an end according to currency strategists. In a recent survey conducted by Bloomberg, the strategists who delivered the best performances in predicting the Euro/USD exchange rate at the end of the first half of 2009, have seen it strengthening as much as 17 per cent in the second half of the year. Deutsche Bank’s Henrik Gullberg, for example, has seen the Euro/USD falling to 1.2 by year-end (a decrease to 1.2 will bring the Euro/USD to a value more in line with the PPP calculated by the OECD, as we suggested in our previous article). The reason for the decline is that the US is pulling itself out of recession at a faster pace than Europe.
Cristoph Kind of Frankfurt-Trust Investment GmbH said to Bloomberg: “If the situation stays as bad as it is, the dollar is a safe haven. And if the economy turns the corner, the U.S. will be the first to get out of the recession. On that basis, the dollar looks like a good investment. We are buying the dollar against the yen and the euro.”
However, for this trend to materialise (the US dollar regaining some ground in the face of an economic recovery) a shift in investors thinking is necessary. Indeed, signs of an economic upswing in the US have been followed by a US Dollar depreciation in the last few weeks.
All in all, we continue to see a series of factors that have the potential to weigh on the Euro in the short term:

  1. A robust US recovery is far from certain. Investors are probably overweighting the positive signals coming from the latest US macroeconomic data: consumer spending is likely to stay anaemic for a long time as consumers are rebuilding their private balance sheets and investments should remain stagnant due to the downtrend in consumer spending;

  2. The interest rate differential is likely to be against the Euro for a long time as we do not see the Federal Reserve rising the Fed Fund rate and the ECB cutting the rate considerably in the short term;

  3. A greater diversification of currency reserves by the BRIC countries is likely to negatively affect the greenback, although a meaningful shift away from the dollar is likely to take years or longer to materialise.

This is why Eurozone fiscal/monetary authorities should not count on a Euro weakening to see a recovery.

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