Daily Management Review

Traders are betting on the strong euro


Just a few years ago the single European currency was practically a symbol of political instability and faced threats to its very existence. Now, it is attracting buyers, while risky assets are being sold all over the world, Bloomberg writes.

This reflects the growing optimism of the markets regarding growth and inflation prospects in Europe, despite the fact that regulators are not inclined to cancel incentives.

"Europe is becoming an attractive place to invest," says Viraj Patel, London currency strategist at ING Groep NV, "This is certainly an argument for medium-term investors who are more sensitive to broader political trends and cyclical economic histories."

Investors do not expect an increase in the rates of the European Central Bank until at least 2019. However, strategists note that it is becoming increasingly difficult to ignore the improvement in the macroeconomic background of the continent. Since interest rates in Europe are still close to record lows, the single currency has so far not been able to exceed the key level of $ 1.20 for a long time. Yet, recent periods of strengthening the euro may probably mean that the ECB can begin to curtail the incentives program.

Analysts interviewed by Bloomberg on average predict that the single currency will strengthen to $ 1.22 in the next year and to $ 1.25 in 2019.

The euro is supported by growing political stability. Risks associated with events such as the elections in France this year are now mostly behind, and the impact on markets of more unexpected events, such as the crisis in Catalonia, has been relatively muted. In contrast, other major currencies, such as the dollar and pound, are currently suffering significant political uncertainty after the elections in the US and the Brexit vote.

In addition, the euro is strengthening against the background of better economic growth forecasts in Europe. Analysts polled by Bloomberg raised their average growth forecasts for the euro area this year to 2.2% from about 1.5% in early January. Last week, data on Germany's GDP surpassed the forecast and stressed the strength of the European economy, which is preparing to demonstrate the best growth in a decade by the end of the year, which provides an additional impetus for Euro bulls.

The euro could rise to 140 paired with the yen from 133 in New York, as speculators continue to increase long positions, wrote strategists of Goldman Sachs Group Inc. in the recommendations for 2018.

The growing current account surplus of the balance of payments and steady growth in Europe will support the strengthening of the euro in 2018, believes Shahab Jalinoos, chief foreign exchange strategist at Credit Suisse Group AG. The surplus increased to a record 3.5% of GDP in June 2016, while in 2011 the figure was about zero, according to data compiled by Bloomberg. The surplus remained at 3% in June.

"The euro will continue to grow, as the current account surplus of 3% of GDP supports it," Jalinoos said in an interview with Bloomberg TV. "Given the combination of this with very strong growth rates that we see in the euro area, there will naturally be an increase."

According to the European Commission, the economy of 19 Eurozone countries will grow by 2.2% this year after rising by 1.8% in 2016. In May, the EC predicted growth in 2017 by 1.7%.

In 2018, the euro area's GDP growth is expected to slow to 2.1%, and in 2019 will be 1.9%. In May, the EC forecast an economic recovery of 1.8% in 2018.

As previously reported, the Governing Council of the ECB decided in October to extend the QE program, while reducing the amount of monthly purchases. The regulator will make monthly purchases of assets of € 60 billion until the end of December 2017. Since January 2018, the ECB will conduct monthly asset purchases of € 30 billion until the end of September 2018 or longer, if necessary.

source: bloomberg.com