Euro Naysayers See More Gloom for Currency as Draghi Steps Aside
(Bloomberg) -- For European Central Bank President Mario Draghi, the battle to save the euro may be over, but for investors the risk of a continued slump in the currency persists.
The euro has fallen more than 3% so far this year and the top forecaster in Bloomberg surveys predicts it will slide as much again to $1.07 by the end of 2019. State Street Global Advisors, Millennium Global Investments and Henderson Rowe are among funds seeing little on the radar to make it worth buying, given the region’s struggling economy and global trade tensions.
“The euro is a big short position for us,” said James Binny, who oversees $129 billion as head of currencies at State Street Global Advisors. “The trade war really impacts Europe quite badly, with Germany very dependent on China. And though the mood music is a little bit better now, this is a story that is probably a multi-year or even multi-decade story.”
The euro has recovered some ground this month after sliding to a two-year low under $1.09 at the start of October, as the European Union looks set to avoid a disruptive Brexit split with the U.K. Binny, who sees this move higher as just a temporary blip, is particularly bearish on the euro versus Scandinavian peers that are the worst-performing major currencies this year.
The common currency edged higher versus the dollar Monday, rising 0.1% to $1.1093, after falling 0.8% last week. It weakened versus the pound, which was buoyed by the European Union agreeing to grant the U.K. a three-month Brexit delay, removing the risk of a damaging no-deal split this week.
Few people are predicting a big drop for the euro, more a continuation of the steady subsidence seen since the start of last year -- keeping it some way below its average since the single currency was created. The lack of bets on sharp moves is reflected in one-year implied volatility for the euro-dollar currency pair being at its lowest since 2007.
Rabobank, which came first in Bloomberg’s latest rankings of forecasters for major currencies, is among the most negative. It sees the euro sliding more than 3% through the remainder of the year as growing global growth concerns hurt German exports and favor the dollar as a haven.
“While a Brexit deal would be a good thing, the outlook for Germany really is not that positive,” said Jane Foley, the bank’s head of currency strategy. “The ECB will have to ease further. All of these factors are negative for the euro.”
In Draghi’s last press conference as ECB president this month, the man credited with saving the euro by doing “whatever it takes” offered an gloomy assessment of the region’s economy. He said everything since the central bank’s previous meeting validated the central bank’s decision to unleash a fresh round of stimulus, which is keeping pressure on the currency.
Government officials and central bank policy makers will be among those in attendance Monday at a farewell ceremony for Draghi in Frankfurt, with both Draghi and his successor Christine Lagarde slated to speak. The scale of the challenge for Lagarde will be shown in figures due this week that are expected to show the euro area’s worst economic performance since 2013.
Data Thursday showed Germany’s manufacturing slump has extended into the fourth quarter and is hitting the country’s jobs market, with employment in industry plunging by the most in almost 10 years. That turned Stephen Innes, a strategist at broker-dealer AxiTrader Ltd., negative on the euro, especially versus the yen.
Germany’s long-held commitment to a balanced budget means it has so far not taken advantage of ultra-low borrowing costs to increase spending to stimulate growth. Its export-reliant economy is forecast to have slipped into a technical recession in the third quarter and there are signs the downturn is weighing on the region.
“The German recession will be very painful,” said Artur Baluszynski, head of research at Henderson Rowe. “The fact Germany is running a surplus with Asia puts the whole euro zone and the euro as a currency in a very tricky situation.”
The euro’s fate heavily depends on the outcome of the U.S.-China trade war. Business confidence and investment surveys globally have been hurt by the trade tensions but the euro zone could fare worse than others given it’s a net exporter.
“The euro area economic outlook points to the fact that the ECB will need to do more,” said Claire Dissaux, a managing director of global economics and strategy in London at Millennium Global Investments Ltd., which manages about $18 billion. “And given there is not enough fiscal stimulus from Germany, ECB quantitative easing and rate cuts are going to be negative for the euro.”
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