Euro Weakness Wanes as Draghi Prompts Traders to Tame Views
The world’s biggest banks are less pessimistic about the euro as the European Central Bank provides unlimited cash to the region’s financial system, Germany may avoid recession and Greece looks to complete the biggest sovereign debt restructuring in history.
Strategists at Bank of America Corp. and Morgan Stanley raised their estimates for the euro this month, as the median estimates of more than 50 strategists surveyed by Bloomberg increased for the second and third quarters. The 17-nation currency is up about 1.3 percent from an almost 10-year low on Jan. 16 against nine developed-market peers.
While the crisis that led to bailouts of Greece, Portugal and Ireland and the restructuring of Greek debt caused the euro to weaken 8.7 percent versus the dollar since August, traders who predicted a breakup of the single currency are being silenced. ECB President Mario Draghi gave banks more than 1 trillion euros ($1.31 trillion) of three-year loans in December and February, and German business confidence rose to a seven- month high.
“We’ve been gradually feeling better about Europe,” David Woo, the global head of rates and currencies at Bank of America Merrill Lynch in New York, said in a telephone interview on March 2. Draghi’s loans have supported the euro, he said. “That combined with the fact that the global economic outlook has improved, including U.S. growth gaining momentum, has made us less bearish on the euro.”
Bank of America increased its June 30 call to $1.30 from $1.25, according to a Feb. 29 note.
The euro depreciated 0.6 percent last week to $1.3123 and is 8.8 percent higher than the average of about $1.2067 since its inception in January 1999. It strengthened 0.2 percent to 108.22 yen, taking its year-to-date advance to 8.6 percent against Japan’s currency.
The euro was little changed today at $1.3110 at 8:14 a.m. London time. It fell 0.5 percent to 107.69 yen.
Draghi cut the ECB’s benchmark interest rate twice, to 1 percent, and expanded the central bank’s balance sheet to more than 3 trillion euros since assuming office Nov. 1, reversing the strategy of predecessor Jean-Claude Trichet, who oversaw 0.25 percentage-point rate increases in April and July.
The measures fueled a rally in Europe’s markets as lenders used cash borrowed under the ECB’s longer-term refinancing operations, or LTROs, to buy higher-yielding assets. Italian two-year note yields have dropped more than six percentage points from a euro-era peak 8.12 percent in November, and similar-maturity Spanish notes have declined more than 3.5 percentage points from 6.12 percent the same month.
Europe’s benchmark Stoxx Europe 600 Index (SXXP) has soared 27 percent since last year’s low on Sept. 23, while Germany’s DAX Index is up 39 percent from its lowest since 2009 on Sept. 12.
The ECB’s three-year loans have been an “unquestionable success” in unlocking credit markets, Draghi said on March 8, after policy makers kept their main borrowing rate at 1 percent. “We are observing a significant inflow, a return of interest, of confidence in the euro.”
Europe’s common currency jumped 1 percent versus the dollar on March 8 as a report showed German industrial output rose more than economists forecast in January. German exports increased 2.3 percent in January, a March 9 report from the Federal Statistics Office in Wiesbaden showed. The Munich-based Ifo institute said on Feb. 23 that its business climate index climbed to 109.6 last month, the highest reading since July.
Predictions of Demise
Predictions of the euro’s demise have waned. “We had a completely irrational market panic at the end of last year, where many people were talking about a breakup of the currency bloc,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a telephone interview on March 9. “Thanks to the ECB, markets are now returning to a semblance of calm and the breakup sentiment is diminishing.”
It will probably trade at $1.34 by the end of June, according to John Normand, London-based head of global currency strategy at JPMorgan Chase & Co., the biggest U.S. lender.
“The ECB’s balance-sheet expansion has been overwhelmingly focused on relieving credit stress, and has had fewer negative impacts in terms of reducing short-term interest rates and raising inflation expectations,” Normand said in an interview on March 9. “That’s why the euro is remaining stable.”
Strategists at Morgan Stanley said March 2 they expect the euro to trade at $1.34 at the end of the quarter, up from a $1.27 forecast a month earlier. They also boosted their estimate for Sept. 30 to $1.24 from $1.18.
“We now believe the ECB will not be quite as aggressive with its policy response and we are not likely to see as deep rate cuts as we were expecting before,” Ian Stannard, head of European foreign-exchange strategy at the bank in London, said in a telephone interview on March. 6. “It looks as if the need for the ECB to take further measures has been reduced and that should allow the euro’s decline to unfold at a slower pace.”
Morgan Stanley now expects a 25 basis-point rate cut this year, coming in the second quarter, compared with a prior forecast for a 50 basis-point reduction in 2012. The firm predicts the euro will slide to $1.19 by year-end.
Its resilience has surprised some of the largest investors in the more than $4 trillion-a-day market. John Taylor, founder of currency hedge fund FX Concepts LLC, predicted in January 2011 that the euro would fall to parity, and still says it will get there eventually, sliding to between $1.15 and $1.18 by May.