Top Euro Forecaster Goes Against Consensus to Stay Bullish

Updated on
  • Currency may touch $1.18 by mid-2018, says DZ Bank’s Marten
  • The euro has risen against all its G-10 peers in 2017

Is the Euro Doomed?

The euro’s surge against the dollar this year still has legs, according to the currency’s most accurate forecaster.

While the 8 percent advance in 2017 to $1.14 is showing some signs of cooling off this week, the euro is likely to maintain its upward trajectory to reach $1.15 by the end of this year and $1.18 by mid-2018, according to DZ Bank AG, which had the best estimate for the second quarter. The bank’s calls are above the median forecast in Bloomberg’s survey, which sees the pair lower at $1.13 by end-2017 and at the middle of next year.

Of the 80 banks that have provided euro-dollar forecasts since June, only 23 saw $1.15 or more by end-2017. DZ was “obviously more bullish than a lot of people” and rightly predicted the limited negative impact the French elections would have on the currency, said Sonja Marten, its Frankfurt-based senior currency strategist.

“The euro has some potential to rise over the next 12 months,” Marten said. With political risks dissipating and an economic recovery gathering pace, the case for the European Central Bank to move away from ultra-loose monetary policy is a major factor that could push the euro higher, she said.

For the full Bloomberg FX forecast accuracy rankings, click here

It’s a view shared by the third-most accurate euro forecaster, Jeremy Stretch, the head of Group-of-10 foreign-exchange strategy at Canadian Imperial Bank of Commerce, who sees the pair at $1.14 by the end of 2017 and $1.16 by mid-2018. Beyond that the euro could reach $1.18 by the end of 2018, though Stretch said he may nudge that higher as the euro will still be on the “cheap side of fair value”.

“We have been pretty upbeat on the euro in the course of the last three to six months and we still see further gains to be made over the course of the next six to 12 months,” said Stretch.

There is however a split among the top three, with the second-most accurate forecaster, Rand Merchant Bank, predicting the euro to slip to $1.10 by the end of this year and then to recover to $1.12 by mid-2018.

John Cairns, a Johannesburg-based currency strategist at the bank, said that while he agrees the talk of tighter ECB policy has helped the euro so far, he is “skeptical that it can go further from here” as there’s “no prospect of the ECB actually hiking rates any time soon, while the Fed will continue” to do so.

ECB President Mario Draghi sent the euro soaring last week with an apparent shift in his tone to a less dovish one. As the likelihood of calls for more unconventional policy measures had “clearly diminished”, ECB officials discussed removing the biases in their communication for rates and asset purchases, an account of the Governing Council’s June 7-8 meeting showed.

Lackluster Dollar

The dollar has failed to make headway against the euro and other major peers this year despite the Federal Reserve being widely regarded as the central bank that would lead the way on tighter policy. While it raised the benchmark lending rate in June for a second time this year, minutes of that meeting released this week showed policy makers remain divided on when to begin shrinking its balance sheet.

“We’ve been saying since the end of last year that as far as the dollar is concerned the Fed is no longer the magic wand that’s going to make it stronger,” DZ’s Marten said. Moves by the Fed are “pretty much anticipated and that means the dollar can’t really profit any more. All the surprise potential is with the ECB.”

1DZ Bank68.18
2Rand Merchant Bank67.19
3Canadian Imperial Bank of Commerce64.92
4Norddeutsche Landesbank64.57
6MPS Capital Services63.03
7CIB Bank60.44
8Argentex LLP60.4
9St George Bank59.62
10RHB OSK Securities59.11
  • NOTE: Forecasters were ranked based on three criteria: margin of error, timing (for identical forecasts, earlier ones received more credit) and directional accuracy (movements with the currency’s overall direction)
(Adds comments by Rand Merchant Bank in the eighth paragraph.)
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