Chronicles of Euro Nosedive

September 1, 2015

Beyond all doubt, the vast majority of broker companies and traders consider EUR/USD as one of the major trading assets. The pair’s close correlation with key macroeconomic indices allows for quite precise long-term forecasts that, in turn, provide fairly good guidance for currency market players and permit them to open positions following a current global trend.

The EUR/USD pair reached a peak of 1.6000 in 2008, after which its cyclical downturn began, accompanied by an active fight between the bulls and the bears. Nowadays, the pair is at the levels of 1996-1997 but apparently it’s not the bottom and the fall is set to continue.

The situation in Greece vividly exposed the eurozone’s stability issues. Even if the Greek debt disaster was managed (not resolved but at least put off for the time being), in Bloomberg’s view, the euro’s appeal as a global reserve currency has been seriously questioned.

According to Bloomberg, since the start of the debt crisis five years ago, the share of the euro in the global currency basket has contracted by about a third and makes just 22% now. Central banks tend to buy dollars and yens instead of gold and euros. Daisuke Karakama, Mizuho Corporate Bank market economist, who also worked in the European Commission, says that central bank chiefs are no-nonsense about the euro’s possible collapse. For the last quarter of 2014 alone, reserve managers of central banks sold nearly 100 billion euro.

Up to a point, ECB President Mario Draghi welcomed the easing of the monetary policy and the decline of the euro, hoping to shore up the eurozone's economy, but that scenario appeared alarming to his counterparts in other countries. This year the euro has already shed about 7% of its value, and, in Société Générale strategist D. Fairmont’s opinion, the main problem currently is that we don’t foresee the bottom for this currency. Capital flight from the EU is on the rise, and by 2017 it can reach an astronomical amount of 4 trillion euro. At this point, the world’s financial agencies and banks are revising their forecasts for the euro at a run. 

Morgan Stanley strategists say that they still have a bearish outlook for the euro since low yielding European assets encourage local funds to move their investments abroad. The interest-rate-growth differentials favor the dollar.  According to Morgan Stanley’s predictions, the euro will reach parity with the dollar at the end of this year. The rate for the end of 2016 is forecast at 0.9500 while by the end of 2017 the euro is expected to fall to the level of 2001-2002 and cost 85-95 US cents. Deutsche Bank voices similar figures. With this, National Australia Bank experts are more pessimistic about the euro’s prospects and believe that the EUR/USD ratio can reach 1.0000 already in the middle of this fall. 

John Gordon, leading expert with international broker NordFX, says, “The summary of the opinions of a host of influential monetary officials may suggest that the euro will drop even more rapidly and EUR/USD can get to a 0.8200-0.8400 low by mid-2016, followed by a gradual rise to 0.9000.”

As for the eurozone economy, the European Commission still seems to reckon (not without reason) that a weakened euro will eventually improve the competitive performance of European goods and increase eurozone GDP.  “Europe’s economic outlook is a little brighter today,” announced Pierre Moscovici, French Finance Minister and European Commissioner for Economic and Financial Affairs. Brussels believes that GDP growth will make 1.3% in 2015 and continue to 1.9% in 2016.

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