June 18, 2010
When the ECB said recently that a slide toward parity would be tantamount to admitting defeat for the euro and the eurozone, we took it somewhat seriously. Which is why we were rather surprised to see that the biggest French bank, and by implication, organization which would suffer massively should the eurozone implode, is out with a EURUSD forecast that goes even beyond parity, and bottoms out at 0.98 by Q2 2011. As we have noted before , it is the very same European banks who are most interested in a destabilized euro, as it would merely entail trillion after trillion in ECB bailouts, providing quarterly bonus make whole packets for all bankers involved. So, without further ado, here is BNP’s thesis, which just as easily could have come from Evans-Pritchard: “Now we are convinced that EURUSD will have to remain weaker for longer and we expect it to drift to 0.97 in Q3 2011. The competitive and wealth gap within EMU will have to be closed to rescue the European project. Peripheral Europe will be exposed to a significant deflationary shock and asset transfers from core European countries will be required to keep these countries and its financial system afloat.” It kinda makes us wonder whether the ECB may have been lying to us all this time.
Full BNP Note:
BNPP projects EURUSD below Parity
Despite this week’s rebound we have revised our EURUSD projections lower once again. So far, we had expected EURUSD to hit parity in Q1 2011, followed by a gradual rebound of the EUR. Now we are convinced that EURUSD will have to remain weaker for longer and we expect it to drift to 0.97 in Q3 2011. The competitive and wealth gap within EMU will have to be closed to rescue the European project. Peripheral Europe will be exposed to a significant deflationary shock and asset transfers from core European countries will be required to keep these countries and its financial system afloat. A weak EUR will help Europe generate the required income to deal with the financial consequences of the crisis. Moreover, the ECB will have to keep interest rates low to deal with the deflationary consequences of closing the inner EMU competitive gap. Consequently, there will be little incentive to place funds in Euroland.
In fact, we expect the ECB to become a global liquidity provider. As long as Europe does not develop a major incident leading to a domino like knock on effect within the financial sector we expect supportive global liquidity conditions to provide asset price support. The over leveraged G-4 economies need to reduce private and public debt levels in order to maintain access to capital markets. Seeing large parts of Asia and the Middle East booming and even Africa reaccelerating its economic expansion will allow the G-4 to rebalance without risking a double dip. Our main scenario is based on such a benign outcome. G-4 currency liquidity will remain cheap and with Asian and other emerging economies steaming ahead, expanding their domestic economies, demand for raw materials will remain high. Yielding commodity currencies will attract foreign funds keeping these currencies supported. Hence, we have revised our commodity currency projection for 2011 higher. We expect USDCAD to decline to 0.87 and AUDUSD and NZDUSD to reach 0.97 and 0.78 respectively in Q3 2011.
In Japan, the new Kan government has put fiscal austerity on the agenda and the BOJ will continue to print money suggesting JPY weakness. A lot of this JPY weakness will materialise against other Asian currencies and the commodity block, while JPY weakness is unlikely to develop against the EUR or GBP. The USD stands in between the strengthening commodity currency block and the weak EUR, suggesting USDJPY will strengthen somewhat. We expect the FED to keep interest rates at current levels well into the year 2012, keeping the US curve steeper when compared to earlier projections. Hence, the USD will be less attractive for US based investors compared to our previous assumptions. Nonetheless, USDJPY downward revisions are minimal and do not change the profile of our call.
Meanwhile, we expect the CHF to develop significant appreciation. The SNB has recognised that its CHF weakening intervention strategy in an environment of positive CHF rate expectations is self defeating.