Euro will rally further, say the most accurate FX forecasters

April 11, 2014

The euro will rise even more, according to some of the top foreign exchange strategists who accurately predicted resilience in the common currency over the past year.

If it does, policymaking will get even tougher for Mario Draghi and the European Central Bank, who are already grappling with inflation at a four-year low and well below the bank’s target.

In 2013, the euro was the best performer among the majors, gaining almost five percent against the dollar, wrong-footing the consensus view in Reuters polls during that period.

The latest poll suggested once again that the euro is set weaken over the coming year in anticipation of a dollar rally as the U.S. Fed is widely expected to end its massive stimulus programme and hike interest rates next year.

While that makes sense as a logical explanation for currency moves, this course of events is so well understood by markets that it’s hard to imagine how anything other than a much earlier interest rate hike isn’t already priced in.

Indeed, some of the most accurate forecasters – UniCredit, Citi, Goldman Sachs and ANZ – are still gunning for the euro to rise. They say the Fed is a long way off from raising rates, and also expect investors to continue to buy European assets.

Roberto Mialich, forex strategist at UniCredit in Milan, won the top spot last year for the second time and has been among the top five forecasters in Reuters FX polls in all but one of the past six years. He expects the euro to firm further in the coming year as the economy picks up.

“One key element that is justifying the euro strength so far is because (ECB President Mario) Draghi has said he will do whatever it takes to save the euro and that should be enough,” said Mialich.

He forecasts the euro to hit $1.45 in a year, well above the consensus view for a fall to $1.29.

The rationale behind the consensus is that a stronger recovery in the U.S. could push the Fed to raise rates earlier than forecast and that could strengthen the dollar.

But recent dovish comments from Fed chair Janet Yellen have arrested expectations of an early rate hike as she said the economy remains “considerably short” of the Fed’s goals of maximum sustainable employment and stable inflation.

Minutes to the latest Federal Open Market Committee meeting also showed that policymakers were concerned that financial markets would get the wrong idea from their latest set of forecasts and wrongly think they were turning hawkish on rates.

“If there is unexpected strength (in) the U.S. economy, we should see a quicker reversal in the current trend,” said Mialich. “But at this stage we continue to bet on the other side, like the Australian (dollar) and the euro.”

Flows of funds into euro zone assets back up that view.

Latest data from Lipper suggest that investors were net buyers of European equity and bond mutual funds, by about 123.7 billion euros in January. Preliminary data for February suggested a similar trend.

That is in line with findings of a separate Reuters poll of global stock markets last month.

It showed European indices – after almost 18 percent gains last year – are expected to be the biggest gainers this year beating U.S. benchmark S&P 500 and the Dow Jones indices.
Investors have even warmed to Greece, snapping up 3 billion euros worth of bonds in the first such auction in four years, at an astonishingly low yield of 4.95 percent.

Hedge funds and other large speculators have increased their bets in favor of the euro since October, data from Commodity Futures Trading Commission show.

The Fed is set to wind its stimulus programme down this year and the BoE stopped buying almost two years ago.

At its April press conference, the ECB made bare that it had warmed up to the idea of printing money – a move which, in theory at least, should have pushed the euro lower on anticipation of a greater supply of euros.

The single currency fell only slightly, closing out last week at $1.3706.

A week later, it has jumped back to just under $1.39.

So far at least, the euro bulls are still right.

— Additional reporting by Ashrith Rao Doddi

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