FYI | Nov 24 2006
By Greg Peel
For months now the EUR/USD has been stuck in a trading range between 1.27 and 1.29. Over the same period everyone from economists to cab drivers has called the dollar down on US economic weakness. Finally, last night, the dollar crossed over the line.
Whether or not there was any connection, Morgan Stanley analysts raised their economic expectations for Europe the night before. Whereas MS had previously factored in a EUR/USD of 1.24 by year end and 1.22 in June, the analysts have materially shifted those numbers to 1.31 and 1.32, indicating a change in value and a change in trend.
The changes follow from a recent appraisal of the G10 which revealed “Euroland” is tracking at 2.6% growth – above its “cyclical potential” of 1.7-2.0%.
However, the analysts remain convinced 2007 will merely be a soft patch in ongoing world economic growth, including a benign, soft landing for the US in particular. They are not overly concerned with either the US current account deficit, or consistent talk about global central banks diversifying out of dollars. They do suggest, however, that the latter might cause the euro to overshoot on the break.
Analysts at investment consultants GaveKal note there is a general expectation the Fed will be forced to ease 50bps by the third quarter 2007 while both the ECB and the BOJ will tighten by the same amount. This is driving US dollar weakness, but GaveKal is backing neither.
Respected commentator Dennis Gartman notes no one thing tipped the dollar over – it was just a case of groaning under the weight of building data. Gartman’s view on the dollar is reflected in his view on gold – he is very bullish gold.
The breakout occurred while most of America was on Thanksgiving holiday. If Yanks are anything like Aussies, they’ll be on holiday again tonight. We’ll thus have to wait until Tuesday our time to see what this breakout might bring.