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Euro to Sink to US$1.08, Says ANZ

The euro hasn’t traded as low as US$1.08 since the early portion of 2017, but that’s where we’re heading within the next 3 months, analysts at ANZ believe.

Posted Apr 07, 2019

Now quoted at only $1.12, the euro-US dollar exchange rate is close to its lowest level in 22 months. Things are about to get even worse, though, and quickly, say researchers at ANZ.

EUR/USD is a particular favourite of currency speculators since it is the most “liquid” of all currency pairs and has the cheapest cost of trading. It is also important for global trade given that the US and European Union are the two largest economic zones in the world.

The past year’s euro weakness is therefore a significant matter and is one that has been driven by Brexit-related uncertainties and barely-measurable eurozone economic growth (0.2 percent growth in each of the past 6 quarters), which have forced the European Central Bank to delay normalisation of interest rates. The ECB’s main refinancing rate has now been held at a non-existent 0.0 percent for three years, and when considered against far healthier economic growth in the US and a Federal Reserve that, until recently, had been expected to steadily hike rates, the euro’s 14-month loss of 11 percent against the dollar is easily understandable.

Having studied the necessary dynamics, ANZ are now fairly convinced that further euro downside is likely.

“We view the risks as skewed towards euro downside in the coming months,” the bank’s researchers said. “Both the Fed and ECB moderated forward guidance on interest rates last month, removing expectations that interest rates will rise this year … [but] US wages, inflation and confidence measures remain strong. On current and expected developments, we don’t see the Fed cutting interest rates this year. As US growth and interest rate expectations recover, we could see USD outperformance.”

ANZ is now predicting a slide in EUR/USD to just $1.08 within the next 3 months.

Another important euro exchange rate, EUR/GBP, traded in March into the £0.84s for the first time in nearly 2 years, though it has since recovered to £0.86 (still 5 percent below January’s highest rate). Its outlook of course depends to a great extent on what type of Brexit, if any, is agreed by UK and EU negotiators. Courtesy of Nordea Markets, we can at least grasp what sort of FX valuations we’ll be facing in different Brexit scenarios.

“A no-deal will put £0.95 in play. In case of any deal, EUR/GBP will be modestly weaker. A Norway-plus model or a permanent customs union would take EUR/GBP fair value to the £0.81-0.83 range, while [Theresa] May’s deal will take fair value to around £0.83-0.84,” Nordea analyst Morten Lund wrote.

Though no-deal would be the most advantageous outcome for EUR/GBP, Lund warns that it is also the least likely by far: “[EUR/GBP] is priced as if a relatively benign exit is … carved in stone,” he says.

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