Euro Will Strengthen in 2016 With or Without Brexit, Mizuho Says

  • Current-account surplus, rising yields, to boost currency
  • Mizuiho in top two euro forecasters in each of past 3 quarters

The euro will strengthen this year no matter which way the U.K. votes in Thursday’s referendum on its European Union membership, according to one of the most accurate forecasters of the currency.

A record current-account surplus and rising inflation-adjusted bond yields will limit any declines in the shared currency to $1.10, said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. The same drivers will then send the euro toward $1.15 by year-end as long as U.S. interest rates stay on hold, he said. Mizuho has been among the top two most accurate forecasters of the euro in each of the past three quarters.

“Forecasts for the euro to collapse on negative news have been around since 2009 but have never been proven right because they are emotional,” Karakama said in an interview on Tuesday. “Markets are running out of reasons to sell the euro with all countries, even Greece, having current-account surpluses now. There is no imminent risk of collapse or crisis.”

The euro rose 0.3 percent to $1.1334 as of 8:46 a.m. in London on Thursday, having strengthened 4.3 percent this year. The currency has climbed almost 8 percent from an eight-month low of $1.0524 set in December.

Record Surplus

The euro area’s current-account surplus increased to a record 36.2 billion euros ($41 billion) in April, from a deficit of 1.46 billion euros at the end of 2010, according to data from the European Central Bank. German 10-year bond yields adjusted for inflation have climbed to minus 0.78 percent from a record low of negative 0.925 percent in May. Italy’s have risen to 0.56 percent from an all-time low of 0.21 percent in December.

Karakama, who worked for the European Commission in 2007-2008, said the euro would already have strengthened on its improving fundamentals had the ECB not introduced unprecedented monetary stimulus. Purchasing power parity suggests the currency is now about 17 percent undervalued, according to data from the Organisation for Economic Co-operation and Development.

“The upward pressure exerted by fundamentals have over the past two years been contained by the ECB’s monetary policy, but that power is waning,” he said.

The euro dropped more than 20 percent after ECB President Mario Draghi introduced negative interest rates in June 2014 to a 12-year low the following March. The currency has traded in a range of about $1.05 to $1.15 since then, and that has narrowed even more this year as the Brexit referendum approached.

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