Euro Bulls Rule in Germany Amid Merkel-Draghi AplombDavid Goodman
German companies are more bullish on the euro’s prospects over the next three months than at any time since February, showing confidence in the ability of the European Central Bank’s interest-rate cuts to spur the economy.
A survey by Commerzbank AG, the nation’s biggest lender after Deutsche Bank AG, found that 26 percent of companies in Europe’s largest economy expect the euro to advance against the dollar, compared with 18 percent forecasting a decline. As recently as March, the bears outweighed the bulls.
This month’s rate reduction by ECB President Mario Draghi to a record 0.5 percent may already be paying dividends in Germany, where Chancellor Angela Merkel faces federal elections in four months. The burgeoning optimism ratifies a report last week from the Ifo institute that found German business confidence rose in May for the first time in three months and another from the Bundesbank predicting growth is gathering pace.
“Corporates were pretty negative on a three-month horizon, but now they’ve turned positive,” Lutz Karpowitz, a senior currency strategist at Commerzbank in Frankfurt, said in a phone interview yesterday. Recently, there has been less “discussion about a euro-zone breakup, and the market’s not concerned about that anymore,” he said.
The euro has appreciated against all 16 of the world’s most widely traded currencies except for the Danish krone since the end of March. It gained about 3 percent versus a basket of nine developed-market currencies, according to Bloomberg Correlated-Weighted Indexes. Today, the euro snapped three days of declines to rise 0.7 percent to $1.2940 as of 12:20 p.m. in New York.
While Germany’s economy grew 0.1 percent in the first quarter after a 0.7 percent contraction in the final three months of 2012 as an unusually long winter damped construction and investment, recent data show things may be picking up.
The Ifo institute said May 24 that its business climate index, based on a survey of 7,000 executives, climbed to 105.7 from 104.4 in April. That’s the first gain since February. Economists predicted sentiment would remain unchanged, according to the median of 44 forecasts in a Bloomberg News survey. Factory orders surged for a second month in March and exports increased.
“Economic activity is expected to improve markedly in the second quarter of 2013,” the Frankfurt-based Bundesbank said in its monthly report released May 21. There’s likely to be “catch-up effects in response to the weather-related downturn in construction activity during last winter,” it said.
Longer term, German companies are relatively pessimistic on the 17-nation euro. Fifty-two percent of German companies in Commerzbank’s survey expect the euro to weaken against the dollar over the next year, compared with 47 percent last month.
The euro’s relative strength, which has seen it rise from last year’s low of $1.2043 in July, may be a reason why a separate survey found that more than 24,000 German companies say demand for their goods is one of the biggest economic concerns over the next 12 months.
Forty-one percent of companies polled by the industry and trade chambers’ DIHK umbrella organization said they worry most about export demand, the group said last week.
“Burgeoning hopes for a revival of foreign business from the beginning of the year haven’t materialized so far,” the DIHK said May 23 in an e-mailed report. “In the coming months, exports aren’t likely to grow very dynamically.”
Exports, adjusted for working days and seasonal changes, rebounded 0.5 percent in March from a 1.2 percent drop in February, the Federal Statistics Office said May 10.
The view of the German companies is similar with bank analysts’ forecasts. The euro will climb 1 percent to $1.30 by mid-year, before dropping to $1.27 by the end of 2013, according to the median of 63 estimates compiled by Bloomberg.
Like the Commerzbank survey, analysts’ forecasts have been getting more pessimistic. Two months ago, the median estimate was for the euro to end the year at $1.29, while three months ago it was for $1.30, data compiled by Bloomberg show.
The ECB cuts its main interest rate to 0.5 percent on May 2, with Draghi saying at a press conference following the decision that another reduction is possible. Gross domestic product in the euro region fell 0.2 percent after a 0.6 percent decline in the previous three months.
Merkel, who emerged as the key political policy maker during the euro-area crisis that began in Greece in 2009, has shifted her focus to longer-term challenges facing Europe and Germany. She signaled yesterday that she will campaign on her defense of the euro in the debt crisis as she seeks a third term in German elections on Sept. 22.
“We have to stand up for a strong euro, while making demands” for economic reforms in euro-area countries, Merkel said during a call-in webcast hosted by her Christian Democratic Union party. “I think there will be a lot of talk about precisely this topic during the election campaign. It will be an absolutely key point.”
Merkel was responding to a caller’s question about how she intends to confront Alternative for Germany, the anti-euro party founded to compete in this year’s election. Her Christian Democratic bloc’s platform, to be unveiled on June 24, will “set down a marker” by “making it clear once again that Germany can only do well if Europe does well,” Merkel said.
At the same time, speculation is growing that Federal Reserve could start to cut back on its extraordinary stimulus measures as the U.S. economy gains traction by reducing its bond purchases under a program known as quantitative easing, or QE.
“We expect the Fed to begin tapering QE in the second half of this year while the ECB may still need to ease policy further given the weak growth outlook,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said in an interview yesterday.
The lender expects the euro to trade at $1.31 by the end of June and to weaken to $1.26 by year-end, data compiled by Bloomberg show.
The Dollar Index climbed to the highest since July 2010 on May 22 as Fed Chairman Ben S. Bernanke said U.S. policy makers could consider tapering their $85 billion of monthly bond purchases if sustained economic improvement emerges.
Options markets also point toward euro declines longer term. The one-year 25-delta risk-reversal rate, or the difference between the price of an option giving the right to sell the euro against the dollar versus the right to buy, is 1.64 percentage points. That’s up from this month’s low of 1.37 percentage points on May 3.
Implied volatility from options trading shows there’s a 28 percent chance that the euro will weaken to below $1.25 in nine months, versus a 9 percent likelihood it will drop to that level in a month, data compiled by Bloomberg show.
Carl Hammer, the chief currency strategist at Swedish lender SEB AB, recommends buying options contracts that bet on the euro weakening to a range of $1.18 to $1.25 in a year’s time, and selling the currency if it climbs above $1.31.
“While we want to join the dollar bulls, patience is required,” Stockholm-based Hammer said in a phone interview yesterday. “We don’t know when the relative monetary policy outlook will change in terms of the Fed tapering and the ECB becoming more accommodative. We think euro-dollar will grind lower but we prefer to be positioned through options.”