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Will EUR/USD Reach Parity By Year End?

EconMatters's picture




 

By EconMatters

The EUR/USD index edged up to 1.2533 on Wednesday, U.S. 4th of July holiday Wednesday in subdued markets ahead of the ECB rate decision to be announced on Thursday.  It is widely expected that ECB officials meeting in Frankfurt will cut benchmark interest rate by between 25bps to 50 bps to a record low of below 1% for the first time, and deposit rate to zero, according to Bloomberg News surveys.  

 

Chart Source: Yahoo Finance, July 4, 2012

 

 

Call for ECB to reduce interest reate has increased with a deteriorating Euro economy in recent months.  Uunemployment rate rose to a record high of 11.1% in May.  Confidence level also dropped to the lowest in more than two and half years in June, while services and manufacturing contracted for a fifth month.  The European Commission now expects the euro economy will shrink 0.3% this year. 


Some believe rate cuts may lower money-market rates and encourage banks to lend, instead of hoarding cash,  Bloomberg reported that almost 800 billion euros is currently being deposited with the ECB each day. 

 

The ECB actually has lent banks over 1 trillion euros ($1.26 trillion) through its LTRO (Longer Term Refinancing Operations) program earlier this year--basically banks get a free ride on ultra cheap cash for three years.  


 Balance Sheet Size - ECB vs. Fed

Chart Source: Money Supply-blogs.FT.com, March 6, 2012

 

 

The problem is that the massive liquidity injection by the ECB does not seem to have trickled down to business and consumers as intended.  The latest ECB data shows lending to households and businesses in the euro zone as a whole turned negative in May, while lending also declined further in the Euro member countries that need it the most--Spain, Ireland, Portugal, Greece and Italy.       

 

At the same time, Societe Generale SA estimates that cutting the key rate by 50bps would save banks 5 billion euros a year. So further ECB rate cuts and the resulted lower borrowing costs most likely will only  help pad the wallets of European banks, rather than stimulating consumer demand and the broader Euro economy.  


More importantly, ECB will not be much room to maneuver with an already below-one-percent benchmark rate, and LTRO 2 is unlikely to accomplish what the first round of LTRO has failed.  Furthermore, this crisis seems to have finally spilled over to the German Economy, which could have serious implication as to the country's future capacity to support more bailouts.         


From that perspective, we think Euro is overvalued compared to the dollar.  The only thing keeping the single currency afloat is the carry trade.  Depending on ECB policy implementation and market reactions, barring any crazy unexpected surprises, Euro should continue to weaken against the Dollar after the ECB rate cut announcement.  EUR/USD could hit 1.15 mark in Q3 this year, and parity in the next six to seven months.    

 

Further Reading: 

Euro Crisis, Deficit Spending, and the Coming NWO

Top 10 Warning Signs of a Global Endgame

 

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Thu, 07/05/2012 - 12:49 | 2589326 matterhornclimber
matterhornclimber's picture

Definately not, Benmoshe will print and print and print and...................so the greenback will loose again.

Just remember that rising greenback will cause stocks to drop but the FED will not allow that.

Do not try to enter these markets either way, you will get grilled anyway, stay cash until politics is

quitting this scamshit!

Thu, 07/05/2012 - 11:53 | 2589124 Dingleberry
Dingleberry's picture

I remember when the euro was created. It was worth less than the dollar by at least a dime.  Even with mad printers Alan and Ben, I could not (and still can't) fathom how in the hell the euro is higher than the USD.  Euro (outside of the Nordics) is absolute, total garbage. Even Mexico-esque.  The only conclusion that I could draw was that the Euro was just the Mark in disguise. Now the disguise is wearing thin.  I wouldn't bet either way right now.  You can't bet short term one way or the other a fundemantals don't matter as all markets are blatantly rigged. And will always be so since it is apparently against the law to send banksters to jail.  At least that law is enforced.

 Gamble away bitchez.....

Thu, 07/05/2012 - 10:50 | 2588838 mark7
mark7's picture

I'd bet these same guys also "predicted" in 2002 that euro will never reach parity with dollar or at least "it won't go much beyond that". Well, guess again, it went all the way up to 1.60. Americans have been talking against euro ever since it was created. It is continuing theme in the US to undermine, to underestimate Europeans. Nothing is never good enough for them if done by Europeans. The myth of American exceptionalism is alive and well...

 

Thu, 07/05/2012 - 10:43 | 2588801 Snakeeyes
Thu, 07/05/2012 - 10:33 | 2588725 K_I_T_T_Y
K_I_T_T_Y's picture

Do not agree, if we look at debt level on percentag of GDP.

It is good for Germany and certain hedge fund to pressure the Euro, they profit, that's reality.

The number of short positions on Euro (against USD) is huge... Actually if thing that there would be an event, any, Euro could start to move positively again.

Why? 2 possibilites. Sell on good news or short squeeze...

Thu, 07/05/2012 - 10:31 | 2588706 ATG
ATG's picture

EUD/USD may not reach parity.

USD targeting 100.

Not parity, but party hearty...

 

EQ, EUD, PM's, TNX all headed South despite rate cuts. (for the rest of the summer?). We'll know more toward the close today...

 6:10 AM - 5 Jul 12 via web · Details

http://richcash8tradeblog.blogspot.com/ 

Thu, 07/05/2012 - 10:10 | 2588577 Bastiat009
Bastiat009's picture

This is very bearish for gold as today's action shows. Euro and gold are one and the same in the eyes of the bankers/traders. They trade in the same direction at the exact same time (with a few exceptions of course).

I know I will be insulted here for saying that gold dropped at the exact moment the euro fell today when the ECB said what everybody was expecting for weeks.

But then again, the bankers/traders in charge of libor are unaware of the way it is set so you can imagine everything about gold.

Thu, 07/05/2012 - 09:47 | 2588505 jmcadg
jmcadg's picture

Fed won't let it happen. Their numbers are based purely on a weak dollar. 

Would like to see it though.

Thu, 07/05/2012 - 09:15 | 2588426 beentheredonethat
beentheredonethat's picture

Parity only if the USA doesn't print more. A dangerous bet in a currency war race to the bottom.

Thu, 07/05/2012 - 12:45 | 2589309 Winston Churchill
Winston Churchill's picture

Yeah,But Obumney is now talking trade wars.

Currency wars become Trade wars which become Shooting wars.

Homo sapiens are heading for extimction ,an evolutionary dead end,

a mamilian Dodo.

Thu, 07/05/2012 - 08:49 | 2588375 trilliontroll
trilliontroll's picture

"The only thing keeping the single currency afloat is the carry trade."

1. From wikipedia about carry :

"... There is some substantial mathematical evidence in macroeconomics that larger economies have more immunity to the disruptive aspects of the carry trade mainly due to the sheer quantity of their existing currency compared to the limited amount used for FOREX carry trades, but the collapse of the carry trade in 2008 is often blamed within Japan for a rapid appreciation of the yen. As a currency appreciates there is pressure to cover any debts in that currency by converting foreign assets into that currency, so this can be an accelerating effect in currency valuation changes. When a large swing occurs, this can cause a carry reversal...."

2. not to forget trade deficit:

2012 : U.S. trade in goods with European Union

NOTE: All figures are in millions of U.S. dollars on a nominal basis, not seasonally adjusted unless otherwise specified. Details may not equal totals due to rounding.

TOTAL 2012

exports 2012

91,048.4

imports 2012

123,968.8

total

-32,920.4

link http://www.census.gov/foreign-trade/balance/c0003.html

Thu, 07/05/2012 - 08:00 | 2588250 Debtless
Debtless's picture

Banks don't want to lend those reserves, they want to invest the free money in the corrupt markets - much, much more lucrative. 

Thu, 07/05/2012 - 08:24 | 2588303 CPL
CPL's picture

Energy markets will take care of that problem.

 

Hard keeping the lights on, guards paid and fed if you don't have gas.

Thu, 07/05/2012 - 05:29 | 2588139 Negro Primero
Negro Primero's picture

From The Guardian and Capital Economics: Roger Bootle's winning entry 'Leaving the Euro, a practical guide':

http://www.policyexchange.org.uk/images/WolfsonPrize/wep%20shortlist%20e...

Thu, 07/05/2012 - 05:28 | 2588137 DutchZeroPrinter
DutchZeroPrinter's picture

But the difference between ECB and Fed balance sheet was bigger in 2008. From what I remember was the euro a lot higher, like 1.60 or so. So this isn't the only thing that matters apparently.

Thu, 07/05/2012 - 04:57 | 2588125 GeneMarchbanks
GeneMarchbanks's picture

Feel free to jump on board this pair, Lord knows it doesn't get enough attention from MSM, momos and clumsy amateurs.

One thing is sure: there won't be epic squeezes on the way to 1.15.

Thu, 07/05/2012 - 03:44 | 2588080 bank guy in Brussels
bank guy in Brussels's picture

Predictions about the euro decline - like above - are like predictions about a Japan collapse ... a lot of people have gone broke betting on both.

John Taylor of FX Concepts - the mega foreign currency investment fund - thought in 2010 that there would be dollar - euro parity in 2011. Wrong by around 3000 basis points.

On the face of it, euro strength despite all the constantly catastrophic european 'crisis' news, indicates the market sees things differently than many predictors.

Jim Sinclair the great US-based investor, has long said it is clear to him that the euro-bashing and much of the euro crisis are manipulations, to distract global investors from the bigger set of problems in the USA ... while at the same time Ben Bernanke secretly provides the fiatscos to keep the global Ponzi afloat abroad as well as in the US.

But besides all that ... How can one make a confident major currency bet in the world of massive and co-ordinated central bank manipulation?

Though the above does only say that the euro 'could' hit parity ... Is that like the way the USA gov't 'could' soon admit that 11 Sept 2001 was a CIA-Mossad job, i.e., anything 'could' happen?

Thu, 07/05/2012 - 12:47 | 2589322 ChubbNut
ChubbNut's picture

If you went broke making a directional bet on a currency pair, then you probably shouldn't quit your day job.  Anyone who has taken a basic finance course understands the risk of not diversifying.

 

How could you not be bearish on the EURUSD?  Europe is so screwed up that anyone with a little cash and some patience will profit from that trade currently.  Until EU leaders actually make some legitimate progress towards solving the structural problems in Europe (which is highly doubtful), I am more than happy to stay short the euro.

 

Once some serious steps towards restructuring happen my opinion will change.

Thu, 07/05/2012 - 09:50 | 2588522 LawsofPhysics
LawsofPhysics's picture

You could have simply said that all fiat is returning to it's true value- ZERO.  How that happens and what the consequences are of that happening can not be predicted.  No one on the planet is having an adult conversation about reality and how modern eCONomics is not grounded in it.  Moreover, no-one is talking about the underlying fraud that continues due to a lack of prosecution.  No system will work in the absence of real consequences for bad behavior.  The planet can start having that conversation or Mother Nature will eventually be the one that delivers those consequences.  You are corect, lots of thing could happen, in any case, TPTB will tell us all how these things were "completely unforeseen". 

Thu, 07/05/2012 - 10:46 | 2588816 TrainWreck1
TrainWreck1's picture

Under normal circumstances, parity would trigger a US buying spree of Eurostuff.

Unfortunately, we are broke, and our dollars are devaluating (new word!) constantly, so it won't help much.

 

 

Thu, 07/05/2012 - 11:46 | 2589101 LawsofPhysics
LawsofPhysics's picture

Precisely why you should be turning them into physical assets of real value ASAP.

Thu, 07/05/2012 - 08:53 | 2588387 Peter Pan
Peter Pan's picture

If both of these fiat currencies become worthless I guess that's parity.

On a more serious note, the most dangerous aspect of the current situation is the complacency that has set in given all the calls of wolf which have not materialised.

Be sure however that the wolf is there and his teeth  are becoming sharper.

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