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SocGen's 4 Reasons Why The Euro Will Keep Falling
After the abysmal March payrolls last Friday, the EUR briefly spiked only to lose all of its gains over the next two several days and then some. And if SocGen is correct, the European currency has much more room to fall. The reasons are not new, recapping what is already widely known, however those wondering why the EURUSD just took out its low stops for the day, the following 4 reasons from SocGen's Patrick Legland should be a useful refresher why Euro parity may be coming faster than most think.
Reason 1: strong bond outflows set to continue
In Q1 15, the euro depreciated against all major currencies (JPY, GBP etc.). Having dropped sharply since May 2014 (-22%), the EUR/USD is now tracking relative yields more closely (see chart). With disappointing US economic data in Q1 – including nonfarm payrolls well below expectations last week (126k) – the EUR/USD could remain range-bound near term, as markets are pricing in a slower pace of rate hikes by the Fed. But the desynchronisation of central bank policies is a long-term theme, with euro rates expected to stay low, while US and UK rates should rise in the medium term. With eurozone yields stuck at extremely low levels, investors must reallocate their investments into higher-yielding assets, in part overseas. Given the large amount of maturing European principals and coupons to be reinvested in 2015 (c.€1.15trn), this could lead to strong outflows over the next quarters and weigh on the euro.
Reason 2: Lingering political risks on Greece and Spain
On 20 February, the Eurogroup agreed to extend the Greek programme until late June and to provide €7.2bn of new funding to Greece on condition that the government passes economic reforms by the end of April. The country is running out of cash but faces only small repayments before the summer, while sizeable payments are due from 20 July onwards. According to our Rates strategists this could lead to continued brinkmanship for some months yet, but no significant change in the status quo. As a result, Greek banks will remain under pressure, as illustrated by the acceleration of deposit outflows (see chart). Our economists’ base case is still that a solution will be found to kick the can further down the road, but the risk of a “Grexit” is not negligible. In Spain, the electoral marathon, which started last month, could increase political instability, with Podemos’ progress to be monitored.
Reason 3: EUR losing its reserve status
- IMF COFER data released last week shows a further drop in official foreign reserves allocated in euro in Q4 2014.
- Since the euro crisis, the currency has been losing some of its reserve status and reserve managers have been looking to diversify their foreign reserves out of the euro.
- This trend is likely to continue due to ongoing political risk and aggressive ECB easing, making the currency unattractive.
Reason 4: ECB likely to extend easing beyond 2016
- The eurozone is enjoying the tailwinds from cheap oil, a weak euro, improving financial conditions, and looser fiscal policy. But, given the still-significant need for deleveraging and reform, these short-term tailwinds may not result in a self-sustained recovery.
- Consequently, our economists expect ECB asset purchases to continue beyond September 2016 if the inflation outlook does not improve.
- In their baseline scenario, they expect the ECB to also add corporate bonds to its asset purchases in 2016 (to support the supply of assets), and extend QE and the TLTRO programme by around one year to mid-2017 (adding an additional €600bn to its balance sheet).
Socgen's summary:
With these major drivers, our FX strategists expect the EUR/USD to depreciate further in 2015, and reach parity by March 2016. How this impacts equity markets will depend on the dominant force behind the fall in the currency. The weaker euro and lower rates resulting from ECB policy should benefit international companies. But if the euro’s depreciation is driven by the perception of heightened political risk, stocks could be negatively impacted. The recent rise in eurozone implied equity volatility in March could accelerate if Grexit fears intensify. Grexit or not, further progress on euro area integration and governance is needed to go from a fixed currency system to a “Genuine Economic and Monetary Union” and reassure investors about the region’s long-term prospects.
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Objects in mirror are closer than they appear.
I object the article: if spreads rise in Germany, for greece, failed BCE, italy's incompetence then euro rise with them
I just shorted 10 lots of EUR/USD at 1.0815 with SL at 1.1066 and take profit at 1.0066. This will be my pension fund.
Just exited EUO profitably but it took about five years from 1.20 to here, leveraged. Stupid is as stupid was.
Objects were opaque to these rogues working at Soc Gen and calling themselves analysts. I wish they would all jump!
End of Aug 2014, these 'analysts' were calling for 1.29 level on the EUR in Mar 2015. http://forex-quebec.com/societe-generale-1-year-forex-forecasts/
They have no fucking idea!
How they still keep a job is beyond me!
They could not even tell you what the colour of the sky is?
Indeed, the angle defines the perception.
And this article reads like the US is in such good shape that’s is the guide for how it should be while it’s just a question who’s going to hit the concrete pavement first.
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When it comes to SocGen and their charts, it's all Greek to me.
Wait till QE4 and US loss of reserve currency. Then what happens to EURUSD? EUR risks are in the open and acknowledged. USD has been running on fumes for years now living off of nothing but its reserve status and its military. At least the Euro area in aggregate still makes capital and consumer goods that it can trade in balance with the rest of the world.
All fiat is garbage, but comparing garbage piles while ignoring the stink of one is pretty pointless.
Read Michael Pettis' CHINA FINANCIAL MARKETS blog for a while. It will explain what is going on with little to no emotion.
I can name the reasons easily enough.
Greece,
Italy, Portugal, Spain, France.
Germany will end up bailing out soon enough as they will refuse to support the deadbeat club.
And the Euro will die.
https://www.youtube.com/watch?v=vRfMc_Q5SYU
Enjoy some B-52s...The Deadbeat Club.
You forgot Ireland . PIIGS .
BULLISH! for European stocks. :-)
The real reason it will go up... They need suckers to sell their Euros to.
It's like trying to pick the best looking horse at a glue factory at this point.
Europe was doomed the day the euro was introduced. Banksters!
why would those cultures in their respective countries honed over centuries want to glom
together in a united states way losing all their personal national identities? the whole thing never made sense to me.
Southern governments wanted low interest rates and northern ones wanted to sell overpriced manufactured shit on credit? Thats what it looks like looking back.
Europe hasnt had enough kids to have a European future. Simple as that and baked in. Hedonist materialist socialism will do that to a nation, on a long enough timeline.
Guesswork and incorrect.
Central bank buys countries own bonds. Countries currency goes down.
If ECB Q/E will be limited by availability then Euro drop versus US$ will stall out, same as happened with BoJ after October. Half-life of this shit is (hopefully) getting shorter.
Se no tienen Plata!
The peoples... They need real money! They need Silver... they need gold... They got fucked when they traded it all for paper!
Euro will fall below parity.
https://www.youtube.com/watch?v=qWyDgJlvbzE
So people still actually believe there are fundamentals at play, and that they know what the fundamentals are?