Home » Market Research »
Market Research
Euro Should Weather Any ECB Policy Shift. By Nicholas Hastings.
LONDON (Dow Jones)--The apparent shift in the European Central
Bank's policy towards an easing bias may not hurt the euro.
Certainly, with the single currency looking overbought against the dollar and with bond yield spreads moving in the dollar's favor, there is a good chance the euro will
be pushed back down to the lower end of its recent trading range at $1.4320.
However, any serious break under that level may prove elusive.
For a start, some analysts believe that the ECB is unlikely to adopt anything like the aggressive rate cutting strategy employed by the Federal Reserve.
"The implication is that interest rate differentials will continue to move against the dollar, providing support for the euro/dollar," said Lee Hardman, currency
economist with Bank of Tokyo-Mitsubishi UFJ in London.
In the immediate aftermath of the ECB's press conference last Thursday, in which President Jean-Claude Trichet appeared to be softening his stance and acknowledging,
for the first time, the risks to euro zone growth from the U.S. slowdown, futures markets started to price in a cut in ECB rates as early as April.
David Simmonds, head of foreign exchange strategy at The Royal Bank of Scotland in London, noted that the narrowing in spreads between the 10-year Treasury note and
German bund spreads "is one of the more coherent explanations for the turn in the euro/dollar".
Simmonds argues that if the ECB is getting drawn into the easing cycle, this could mean a broadening in negative euro sentiment, and that the single currency's best
days are past.
"The euro's elevated valuations are seen by some as difficult to justify in a cycle when euro rates are coming down," Simmonds said.
The single currency could also be vulnerable to investor fear that the ECB's continued reluctance to ease policy is misguided.
Hans Redeker, head of foreign exchange strategy at BNP Paribas in London, suggested that the decline in euro-zone equities in response to Trichet's comments on Thursday
"indicate that the hawkish approach lacks credibility".
"Long-term capital is fleeing euroland, suggesting the short-term interest rate differential will provide insufficient support to keep the euro at current overvalued
levels," Redeker stated.
The importance of equities in determining the euro's performance against the dollar is focused on by Steve Pearson, chief currency strategist with Bank of Scotland in
London.
He suggested that a break in the euro under the lower end of its recent trading range will depend on a further decline in equities beneath their recent low.
"If equity markets again fall sharply (i.e. financial conditions worsen) a breakout of the bottom of the range is likely," Pearson said.
Nevertheless, if the relative level of euro zone interest rates remains a primary driving force for the euro's performance, then the single currency may find that it
has more bounce.
Peter Vanden Houte, chief euro zone economist with ING Financial Markets in Brussels, said that although the next move in ECB rates may now be down, the central bank
will be keeping its eye on inflation pressures.
"With important wage negotiation still underway in Germany, the ECB will not be in a hurry to ease monetary policy," he said, suggesting that rates won't come down
until the summer months.
Lena Komileva, group G7 economist with international brokers Tullett Prebon in London, also isn't looking for an early move on rates.
Noting the ECB's continued inflation concerns, she said "this leads us to believe that while this month's changes in the ECB's language are significant the bank may not
be ready to cut rates as early as in April."
And, if that isn't enough to provide the euro with some underpinning, there are those who suggest that the single currency is still likely to be driven more by the
price of crude than anything else.
Greg Anderson, currency strategist with ABN-Amro in Chicago, points to the positive correlation between Brent crude and the euro since early last year. He believes that
given this, the single currency will make it back up to $1.49 in June, and as far as $1.56 by December.
In Europe early Monday the dollar is mixed after the weekend's G7 gathering left FX language largely unchanged.
At 0810 GMT the Euro is fetching $1.4568, up from $1.4510 in late New York trade Friday.
Elsewhere the dollar is mixed, down against the Yen at Y106.61 against Y107.32, and the Swiss franc at CHF1.10 from CHF1.1030, and against the british pound at $1.9411
from $1.9460.
Certainly, with the single currency looking overbought against the dollar and with bond yield spreads moving in the dollar's favor, there is a good chance the euro will
be pushed back down to the lower end of its recent trading range at $1.4320.
However, any serious break under that level may prove elusive.
For a start, some analysts believe that the ECB is unlikely to adopt anything like the aggressive rate cutting strategy employed by the Federal Reserve.
"The implication is that interest rate differentials will continue to move against the dollar, providing support for the euro/dollar," said Lee Hardman, currency
economist with Bank of Tokyo-Mitsubishi UFJ in London.
In the immediate aftermath of the ECB's press conference last Thursday, in which President Jean-Claude Trichet appeared to be softening his stance and acknowledging,
for the first time, the risks to euro zone growth from the U.S. slowdown, futures markets started to price in a cut in ECB rates as early as April.
David Simmonds, head of foreign exchange strategy at The Royal Bank of Scotland in London, noted that the narrowing in spreads between the 10-year Treasury note and
German bund spreads "is one of the more coherent explanations for the turn in the euro/dollar".
Simmonds argues that if the ECB is getting drawn into the easing cycle, this could mean a broadening in negative euro sentiment, and that the single currency's best
days are past.
"The euro's elevated valuations are seen by some as difficult to justify in a cycle when euro rates are coming down," Simmonds said.
The single currency could also be vulnerable to investor fear that the ECB's continued reluctance to ease policy is misguided.
Hans Redeker, head of foreign exchange strategy at BNP Paribas in London, suggested that the decline in euro-zone equities in response to Trichet's comments on Thursday
"indicate that the hawkish approach lacks credibility".
"Long-term capital is fleeing euroland, suggesting the short-term interest rate differential will provide insufficient support to keep the euro at current overvalued
levels," Redeker stated.
The importance of equities in determining the euro's performance against the dollar is focused on by Steve Pearson, chief currency strategist with Bank of Scotland in
London.
He suggested that a break in the euro under the lower end of its recent trading range will depend on a further decline in equities beneath their recent low.
"If equity markets again fall sharply (i.e. financial conditions worsen) a breakout of the bottom of the range is likely," Pearson said.
Nevertheless, if the relative level of euro zone interest rates remains a primary driving force for the euro's performance, then the single currency may find that it
has more bounce.
Peter Vanden Houte, chief euro zone economist with ING Financial Markets in Brussels, said that although the next move in ECB rates may now be down, the central bank
will be keeping its eye on inflation pressures.
"With important wage negotiation still underway in Germany, the ECB will not be in a hurry to ease monetary policy," he said, suggesting that rates won't come down
until the summer months.
Lena Komileva, group G7 economist with international brokers Tullett Prebon in London, also isn't looking for an early move on rates.
Noting the ECB's continued inflation concerns, she said "this leads us to believe that while this month's changes in the ECB's language are significant the bank may not
be ready to cut rates as early as in April."
And, if that isn't enough to provide the euro with some underpinning, there are those who suggest that the single currency is still likely to be driven more by the
price of crude than anything else.
Greg Anderson, currency strategist with ABN-Amro in Chicago, points to the positive correlation between Brent crude and the euro since early last year. He believes that
given this, the single currency will make it back up to $1.49 in June, and as far as $1.56 by December.
In Europe early Monday the dollar is mixed after the weekend's G7 gathering left FX language largely unchanged.
At 0810 GMT the Euro is fetching $1.4568, up from $1.4510 in late New York trade Friday.
Elsewhere the dollar is mixed, down against the Yen at Y106.61 against Y107.32, and the Swiss franc at CHF1.10 from CHF1.1030, and against the british pound at $1.9411
from $1.9460.
11 February | 
0 comments
0 comments
