The most accurate foreign-exchange forecaster says the euro will continue to weaken and may approach parity with the dollar as the European Central Bank buys more government bonds to support the region’s economy.
Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, said the euro will depreciate to $1.13 in the third quarter, $1.08 by year-end and may near $1 in 2011 before recovering. Osborne, whose predictions were within 4.1 percent of the mark on average, according to data compiled by Bloomberg, was echoed by the nine following most-accurate forecasters in anticipating a lower euro in the next two quarters.
The euro weakened 15 percent against the dollar in the first half on speculation record budget deficits from Ireland to Portugal and Greece will force governments to cut spending and reduce economic growth. Bond yields among the euro-area’s so- called peripheral nations surged relative to German bunds even as European Union leaders crafted an almost $1 trillion aid package to avoid sovereign defaults.
“It’s going to be an immensely challenging environment for these economies to try and regain competitiveness internally within the euro zone,” said Osborne, 47, who has been head of currency strategy at TD Securities since he joined in 2006 from Scotia Capital. “The ECB is moving towards its version of quantitative easing. It suggests they’re going to be very late now to the tightening cycle.”
The currency, shared by 16 European nations, rose 0.5 percent to $1.2596 as of 8:45 a.m. in London. It has gained 5.6 percent since hitting a more than four-year low of $1.1877 on June 7, after falling from 2009’s high of $1.5144 on Nov. 25.
Diversifying Reserves
The ECB began buying government bonds from some member nations on May 10, part of the EU rescue package, to cap yields and underpin the euro. The decline threatens to break up the region, former Federal Reserve Chairman Paul Volcker said in May, while central banks are putting more of their reserves into currencies other than the euro, data from the International Monetary Fund show.
“Reserve diversification, one of the drivers behind euro strength ever since the introduction of the single currency, is therefore unlikely to be euro-dollar supportive over the next few years,” said Henrik Gullberg, a strategist in London at Deutsche Bank AG, the world’s biggest foreign-exchange trader and one of the five best predictors of the currency’s decline against the yen and the pound this year.
Most Accurate
TD Securities, a unit of Canada’s second-biggest lender, Toronto-Dominion Bank, was also the most accurate forecaster for the dollar against the yen, second best for the euro versus the yen and the dollar-Swiss franc exchange rate. The firm’s predictions had the lowest margin of error in a survey of 48 forecasters of eight currency pairs in the past 18 months.
The firm surpassed second-ranked Standard Chartered Plc, whose margin of error was 4.37 percent, third-place Wells Fargo & Co., Credit Suisse Group AG in fourth place and Canadian Imperial Bank of Commerce in fifth.
Recent euro strength is a sign traders are trimming bearish bets after wagering correctly that the currency would weaken, rather than a change in sentiment, according to Callum Henderson, head of foreign-exchange strategy at Standard Chartered in Singapore.
Fiscal Tightening
“We do not think euro-dollar weakness is over,” Henderson wrote in an e-mail. “Growth in the euro area will remain subdued for some time due to fiscal tightening. To be sure, euro weakness will benefit the exporters in north Europe.”
Henderson predicts a drop to $1.10 to $1.12 this quarter, before the euro recovers to $1.30 by 2012.
CIBC, based in Toronto, predicts the euro will depreciate to $1.18 in the third quarter, before climbing to $1.20 by the end of the year and $1.24 by mid-2011. The next six months will be a “turning point” as traders focus on economic frailty in the U.S., said Avery Shenfeld, the chief economist at CIBC. The Toronto-based firm’s average margin of error was 5.19 percent.
Futures show a majority of traders don’t expect an interest-rate increase by the Fed until the second quarter of 2011 after the central bank said June 23 that “financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”
“There will be an absence of enough growth to prompt Fed tightening anytime soon, and a recognition that if domestic demand cannot sustain the U.S. expansion that a weaker dollar will be needed to allow trade to fill in for some of that,” said Shenfeld, who joined CIBC 16 years ago and has been chief economist for a little more than a year.
Rate Differentials
The Fed has kept its benchmark interest rate at zero to 0.25 percent since December 2008, while the ECB’s main rate has been at a record low of 1 percent since May 2009.
The most accurate analysts were identified using data gathered for Bloomberg’s Foreign Exchange Forecasts function.
Firms were compared based on seven predictions: six forecasts as of the end of each quarter for the close of the subsequent quarter, starting Dec. 31, 2008, plus estimates as of a year ago for this year’s second quarter. Only firms with at least four forecasts were ranked in each currency pair, and only those that qualified for ranking in at least five of eight pairs were included in the overall best list.
The majority of analysts say the euro has further to fall against the dollar, dropping to $1.19 in the first quarter and ending 2011 at $1.21, according to the median of at least 26 forecasts compiled by Bloomberg.
Weakness ‘To Persist’
“Over the next six months, the market’s concern over the growth outlook is likely to persist,” said Derek Halpenny, European head of global currency research in London at Bank of Tokyo-Mitsubishi UFJ Ltd., which ranked seventh overall, with a 5.55 percent margin of error. “The scenario for the global economy is deteriorating, and in those circumstances you’ve got to prefer the dollar over countries where they are implementing austerity programs.”
The euro is most likely to weaken in the second half of this year against the Australian, New Zealand and Canadian dollars, said Nick Bennenbroek, 39, global head of currency strategy in New York at Wells Fargo, the biggest U.S. home lender. The bank had a margin of error of 4.76 percent across all currency pairs and was the top forecaster for the dollar against the yuan.
‘Continue to Weaken’
“Our overall view is that the euro will continue to weaken and Australia, New Zealand and Canada will rebound over the next year,” said Bennenbroek, who joined the bank in 2007, beginning his career in finance at the New Zealand Treasury in Wellington. “These are medium-term trades we believe people should be putting on now.” The euro will end this year at $1.20 and conclude 2011 at $1.08, he said.
Currency forecasting became easier the past 12 months after the worst of the global financial crisis, sparked by Lehman Brothers Holdings Inc.’s collapse in September 2008, passed, said Niels Christensen, 49, chief currency analyst at Nordea Bank AB in Copenhagen. Nordea was the most-accurate forecaster for the euro-dollar exchange rate.
“In March 2009, everybody was wondering whether we would get another Lehman, that the economy was extremely fragile,” he said. “In December 2009, the wave of risk appetite was abating and currencies started to trade on fundamentals and rate differentials again.”
The euro will trade at $1.25 through year-end before weakening to as low as $1.15 in 2011, according to Nordea.
Ray Farris, head of foreign-exchange strategy in London at Credit Suisse, whose margin of error in the survey was 4.81 percent, said he wasn’t able to immediately comment.
The European currency will rise versus the yen, climbing to 114 yen in the fourth quarter and 127 yen by the end of 2011, from 109.36 today, median forecasts show. The pound will fall to $1.44 this quarter, and strengthen to 81 pence per euro in the first quarter, the estimates show. Sterling was at $1.5202 and at 82.85 pence per euro today.
