Best Euro Forecaster Breaks From Pack to Predict Sustained Rally

  • Only existential threat to euro can scupper advance: Mizuho
  • Poland's TMS Brokers leads overall 3Q forecaster rankings

It would take a calamity to send the euro tumbling as low as most forecasters anticipate.

That’s the view of Mizuho Bank Ltd., which topped Bloomberg’s third-quarter rankings for the euro against the dollar, the most-traded currency pair. It succeeded by being more bullish than the consensus, and sees no reason to change strategy now. The Japanese lender puts “fair value” at $1.20, about 7 percent stronger than current levels and compared with the $1.08 median year-end estimate of more than 60 strategists.

“For the euro to fall below $1.08, there has to be something that challenges the integration of the common currency,” said Daisuke Karakama, chief markets economist at Mizuho in Tokyo. “The euro is underpinned by real demand as the euro zone is, and will likely remain, the world’s largest current-account surplus area.”

That surplus has helped make the currency a haven from the turmoil stalking global markets in recent months, pushing it higher in defiance of analysts’ and speculators’ expectations. Mizuho’s optimism was vindicated Friday, when a below-forecast U.S. jobs report diminished the case for a dollar-boosting interest-rate increase by the Federal Reserve -- and sent the euro to an almost two-week high of $1.1319. The shared currency was at $1.1229 as of 7:40 a.m. on Monday in New York.

The euro zone’s current-account surplus totaled 33.8 billion euros ($37.9 billion) in July, bigger than the 1.8 trillion yen ($15 billion) of Karakama’s native Japan. A surplus in the broadest measure of a nation’s trade means a country doesn’t need to rely on foreign investment to plug a deficit, which tends to make its currency less vulnerable to shocks from overseas.

Falling Prices

For Karakama, the structural demand this creates outweighs the impact of negative euro-area inflation and the prospect of more monetary easing from the European Central Bank to address it. While the policy divergence between Europe and the U.S. has weighed on the shared currency, it will become less important next year as the Fed raises rates more slowly than markets anticipate, he said.

Mizuho’s target ranges for the euro are $1.08 to $1.17 this year, and as high as $1.22 in 2016, and Karakama said that if the shared currency falls, it will reach its low point in the first quarter of next year.

Selling euros, particularly against the pound, is the favorite trade of TMS Brokers, the Warsaw-based company that led Bloomberg’s overall forecaster rankings for the four quarters ending September.

It’s also the top call of Toronto-Dominion Bank, the most-accurate on euro-sterling predictions.

TMS sees the euro falling to 71 pence by year-end -- matching TD’s estimate -- and 68 by the middle of 2016, from 73.90 pence on Monday in New York. Europe’s shared currency rose more than 4 percent versus its U.K. peer in the three months through September, ending eight straight quarters of declines.

Once the China-fueled volatility in global markets abates, “fundamentals should kick in” and drive the euro lower, said Konrad Bialas, the TMS analyst who’s responsible for compiling the Polish brokerage’s forecasts.

“December will be crucial for euro-dollar” as the Fed considers its first rate increase, Bialas said from Warsaw. “And also, we’re forecasting some kind of extension in the ECB’s quantitative-easing program,” which will send the euro sliding to $1.09 by year-end and $1.03 by the middle of 2016, he said.

The best forecasters in Bloomberg’s rankings were identified by averaging individual scores on margin of error, timing and directional accuracy across 13 currency pairs during the past four quarters.

Companies had to be ranked in at least eight of the pairs to qualify for the overall placing, with 61 making the cut. TMS’s score of 63.68 compares with second-placed Saxo Bank A/S’s 59.08 and National Bank of Canada in third with 58.76.

While the ECB’s policies will send the euro lower in the long term, the currency’s direction is less clear-cut since the rout in riskier assets, said John Hardy, Saxo’s Hellerup, Denmark-based head of foreign-exchange strategy.

He predicts a drop toward $1.08 around the end of this quarter and to dollar parity in the first half of next year.

“This whole risk-appetite situation is what’s dogging me in terms of my forecasts,” Hardy said. “I would still as a forecast call it lower,” but “that can really throw the levels this way and that in the short term.”

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