Australia | Nov 29 2006
By Chris Shaw
So far the euro’s break above 130 against the US dollar is displaying the patterns technical analysts look for as the consolidation period after breaking through that level didn’t include a re-testing of 1.30, analysts at Belgian-based KBC taking this as a sign the trend remains upward.
UBS agrees, suggesting the next target is 1.33, before a longer-term move to test previous resistance at 1.36/1.37. In the broker’s view the currency has the potential to overshoot and hit as high as 1.40, but such a move is unlikely to be long-lasting as a return to 1.30 is seen as likely sometime next year.
Danske Bank also sees a move to around 1.35 as likely in the medium-term, though it would not be surprised if there was a further test of the 1.29 level before this occurs. It sees three factors as contributing to the strength of the euro, one being simply a seasonal trend of euro strength against the US dollar in the final quarter of the year.
This seasonal move is strongest in December, as it notes the average rise for the euro against the greenback in the last month of the year is 1.8%, though since 1999 the average has been a 2.8% gain.
While some market talk has suggested a reversal in the carry trade is also contributing to the latest weakness in the greenback Danske is not so sure, suggesting the relative weakness of the yen against the euro is more suggesting of any unwinding being a correction rather than an actual trend.
UBS points out the recent move has been helped by Asian concerns over the US dollar weakness hurting their economies in terms of the value of their exchange reserves being made public. China in particular has been vocal in recent days regarding this, the broker seeing this as providing some justification for the greenback’s latest weakness.
Adding to the softness in the US dollar has been the lack of any data to fully dispel the market’s fears the US economy could have a hard landing, a view shared by Credit Suisse as the broker recently scaled back its December quarter growth forecast for the US economy to 2% from 2.5%. With such an outlook Danske Bank argues the next movement in rates by the Federal Reserve is still likely to be down, as never in its history has it followed a pause in increases with further rises.
In contrast the European economy looks quite good and is currently performing better than expected, leading some policy officials to suggest the recovery in growth will run at least into 2008. With policy makers also making comments suggesting the latest strength of the euro against the US dollar is not a threat to growth, Danske suggests there is little surprise in the fact the euro has moved so sharply.
But such a move is unlikely to last in the group’s view, as it continues to suggest a soft landing is the most likely outcome for the US once it shows the worst is now behind it. If this proves correct, the bank will be right in suggesting the current period is likely to prove to be the peak in terms of euro outperformance against US dollar.