Daily Management Review

Euro Is Dropping Close To The Parity Pain Point


Euro Is Dropping Close To The Parity Pain Point
A rush for dollars as global economic slump fears loom has beaten and scarred other currencies, with the euro suffering the most as rising European gas prices worsen economic growth concerns.
Analysts anticipate the euro, which plummeted to its lowest level since 2002 on Tuesday, will soon revert to parity.
The euro is viewed as especially vulnerable due to Germany's, Italy's, and others' reliance on Russian gas, as well as concerns that major European Central Bank rate hikes could trigger another eurozone financial crisis.
"All of this means the euro will fall further and markets are waking up to that," said Jordan Rochester, FX strategist at Nomura Securities. "We are looking for parity and the question is whether that is too small a move or whether it can go lower. We think it can."
The euro has lost 10% versus the dollar this year, bringing it dangerously close to the psychologically crucial parity level it last saw in mid-2002, when it was just three years old.
It has also hit new seven-year lows versus the Swiss franc, the pound, and the yen, although few analysts believe it has bottomed.
Nomura analysts have cut their euro/dollar target to $0.95, meaning that parity might be reached as early as August. Citibank considers parity to be "inevitable."
Nomura, on the other hand, claimed that $0.95 was not historically significant, given that the euro dropped from $1.17 shortly after its formation to $0.82 in October 2002.
They discovered that by extrapolating backwards using its historical currencies, the euro traded as low as $0.6444 in February 1985.
Soaring gas prices, along with forecasts of a big decline in Russian supply, are creating concerns about a serious European energy crisis this winter.
Natural gas prices have more than doubled since the June lows and are up 465 percent year on year. A significant pipeline maintenance dispute has emerged between Russia and Germany; prior to the Ukraine conflict, the eurozone imported about 40% of its energy needs from Russia.
Furthermore, Norwegian oil workers went on strike lately, potentially withdrawing 292,000 barrels of natural gas equivalent from the market.
According to economists, the eurozone will enter recession faster than its competitors. According to Nomura, the eurozone economy will enter a recession in the third quarter, with GDP falling by 1.7 per cent.
Bond yields are rising, increasing the likelihood of a recession. Government bond prices in Europe have risen quicker in the last two weeks than in the United States, indicating a sharper tightening of financial conditions.
"Recession risks and the downgrades to European growth that we are seeing are all driving these (euro) moves," said Grace Peters, EMEA head of investment strategy at JPMorgan Private Bank.
The euro's depreciation is another source of concern for the European Central Bank (ECB), which is grappling with record-high inflation as a result of a weak currency, which drives up import prices.
Prior to the latest plunge, ECB policymaker Francois Villeroy de Galhau warned in May that the euro's weakness makes attaining the bank's 2% inflation target more difficult. The European Central Bank is widely expected to resume hiking interest rates this month, for the first time since 2011.
Rising energy prices, on the other hand, increase the likelihood of a recession, therefore money markets have curtailed aggressive rate hike bets.
Normally, a considerably weaker currency would worry the ECB, but the euro has fared far better on a trade-weighted basis, which officials choose to examine.