What's That Up There? Why, the Euro
The euro has been bouncing around $1.45 for the past several days. How much further can it run?
Here's what the experts told me.
Alan Ruskin, global head of FX strategy at Deutsche Bank, says the euro's strength isn't really about the euro.
"This is less of a euro-positive story than a dollar-negative story," he told me. "People are using the dollar to fund higher yielding assets. Ever since the European Central Bank raised rates, or even before when they signaled their intent to raise rates, it's taken the euro out of the firing line as a funding currency. So you're left with the dollar, and after the earthquake, the yen."
Ruskin believes the euro could move higher against the dollar, quite possibly to around $1.50. But at that point, simple valuation - and, really, any indication of monetary policy shifts - could turn things around.
"The rate expectations are probably not going to shift much more in favor of the euro," he said. And given all the negative sentiment toward the dollar, "For a serious reversal you really just need the Federal Reserve to kick in."
Win Thin, global head of emerging markets strategy at Brown Brothers Harriman, is expecting a similar move, but for slightly different reasons.
"You'll see swings in sentiment, but overall, interest rate differentials will continue to favor the euro," he told me. "Also, we keep hearing about reserve differentiation. Oil producing countries are selling $120 oil and getting 30% more dollars than before," and they want to diversify, he said, adding that Asian central banks are taking similar steps.
But Thin doesn't think the euro has too much further to move up.
"Should the euro really be over $1.50? The last time it was, the U.S. was going down the drain. I just don't think we're in that phase right now," he said. "It looks like the euro can gain a little, but at some point people holding euros will have to think about what they're holding. It's not just Germany. There's also Spain and Portugal."
Over at Nomura Securities, JensNordvig, head of G10 FX strategy, is actually recommending ways to short the euro. He and his team believe the euro's lower risk premium will endure for a while, but "We are looking for excessive ECB pricing/lower oil prices as potential catalysts for a turn," they said in a research note. They suggest selling the euro against the Swedish krona and the Norwegian krone.
The bottom line: plenty of things are supporting the euro right now. But be careful - that ground could shift.
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