© Kit Juckes
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I believe that the ECB will try to get interest rates lower and continue to ease the monetary policy further. The question is how much central bankers can get market rates down from here. The net result of the last week's ease was a fall of 4 basis points in two-year interest rates on week and 15 bp since mid of October. These are quite modest moves in market rates as a result of what the ECB does, and that is the difficulty with having interest rates this close to zero. As I have already mentioned, I expect that central bank will continue to lower interest rates; moreover, I think we will get further LTRO in the first quarter of next year. In my opinion, policy makers will try to keep the whole yield curve in Euro as anchored as possible; however, I am not sure whether this is going to drive the Euro significantly lower on its own, as they cannot move rates a lot lower from where we currently see them. A bigger move for EUR/USD into 1.20 – 1.30 range will depend on U.S. bond yields moving higher as the market becomes more confident that the U.S. will cut back its bond purchases and eventually raise interest rates.
How do you evaluate the overall performance of the Euro against its major counterparts?
Overall, evaluating the past, the Euro is frustratingly strong against its major peers. Europe has a tight monetary policy, falling bank lending, huge current account surplus with excess savings and rapidly falling inflation, which means that real interest rates are quite high. All of this is supporting the Euro and holding it up. However, Euro needs easier monetary policy, there is a necessity to increase consumption, boost investment and spending relative to savings, all of that would help the European economy have a more stable future and would probably weaken the currency as well, but it will require some time. It would be a long, slow path from here to 1.20 in EUR/USD.
What are your long and short term forecasts for EUR/JPY and EUR/USD?
In the long term, over the next several years, I expect the Euro to fall towards 1.20 against the U.S. Dollar. In my opinion, we may see 1.25 at the end of next year, and it will fall even further; however, it will take a long time. With regards to the Euro against the Japanese Yen, I expect the move to be smaller, as I fully expect USD/JPY to move higher over time. Nevertheless, I believe that we will see EUR/JPY continuing to trade in the 125 – 130 range for some period of time.