FYI | Feb 25 2008
By Chris Shaw
Economic data from the US in particular continue to suggest the US dollar should weaken against the euro but as Danske Bank chief strategist Teis Knuthsen points out, recent trading has not reflected this. Are we witnessing a turning point in the relationship between the two currencies?
In Knuthsen’s view both market positioning and conventional wisdom have now turned in favour of the greenback but it remains a little too early yet to turn outrightly bullish on the outlook for the dollar as neither commodity prices or relative rates support such a shift.
There are some indicators the smart money is shifting towards the US dollar though, Knuthsen noting options markets have turned increasingly in favour of the dollar in recent weeks while speculative long euro/US dollar positions have fallen sharply at the same time.
While this doesn’t impact on his short-term forecast of further strength in the euro, with a 3-month target of 1.52 compared to a current rate of a little more than 1.48, it does impact on the medium-term picture. Here the story is different as Knuthsen points out while economic conditions are deteriorating in both the US and Europe the US is further advanced in terms of its downturn.
The latest economic data for Europe confirm the region is in a downturn and further poor numbers are expected in coming weeks, but the recently announced stimulation package and the likelihood of some general improvement in conditions from summer on means the US is closer to bottoming out prior to a recovery.
Another factor supportive for the dollar Knuthsen notes is a loose correlation between the euro/US dollar rate and equity prices, so all other things being equal the recent weakness in equities globally favours the US dollar. At the same time there is a link between the oil price and the two currencies, which of late has been supportive of the euro and so offsets to some extent the equity price link.
The conclusion in Knuthsen’s view is while economic data are inconclusive the likelihood is the US dollar may benefit more from good news and get punished less for bad news going forward, which supports his medium-term forecast for the two currencies that calls for a rate of 1.40 by year’s end. This estimate is in line with market consensus acording to a recent survey by Bloomberg.
From a technical perspective Knuthsen notes the uptrend for the euro remains in place until 1.4310 is broken.
