To watch euro traders these days, you'd almost think the sovereign debt crisis was distant history.
In a serious case of glass-half-full vision, investors are snapping up the common currency, buoyed by early repayment of some bailout-related debt and eager for yield as interest rates fall in other countries.
But if you think the euro is out of the woods, think again, say the currency strategists at Barclays Capital. "The key issue," they say, "is how quickly the turn in the financial sector will have an effect on the real economy."
Yes, Germany recently reported very respectable business activity, with its services PMI well above 50, the breakeven level. Meanwhile, however, France issued a downbeat PMI report. This divergence is troubling the BarCap analysts, since it suggests that policymakers may feel a need to respond with new stimulus or other measures.
"We think that continuing divergence in the economic performance within the euro area would likely to require a policy response, leading to a weaker EUR," the strategists wrote in a note to clients. "Therefore, we maintain our bearish EUR outlook in the medium term."
As for a way to trade this view, the strategists say to steer clear. "We're not recommending any EUR trade at the moment – we see upside risk to our EUR/USD forecast in the near-term (our 3m forecast is 1.32), but are cautious on going long at this level given euro area's still weak economic outlook," strategist Yuki Sakasai told me.
Be careful out there.
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