© Arne Lohmann Rasmussen
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Arne Lohmann Rasmussen, Head of FX Strategy at Danske Bank, and Georgette Boele, Head of FX & Commodity Strategy at ABN Amro Bank, on EUR/USD
S&P has downgraded Spain's credit rating by two notches. Was there any reaction from EUR/USD on that decision?
G.B.: We did not see any strong reaction by EUR/USD because the market had already expected this.
A.L.R.: We saw initially that EUR/USD sold off, and that the Euro came under pressure, but it recovered during the day and it seems like risk sentiment has to a certain degree returned to the market and the tail risk to the Euro has fallen. People do not see this bad news to the same degree as with the case a few months ago, and we are very much agree with that view. We think that EUR/USD is a buy-on-dips. In fact, we can argue that the downgrade from the Standard & Poor's makes it even more likely that Spain will ask for a precautionary programme and when that happens, we expect it to be EUR/USD positive.
S&P downgrade has increased pressure on Spain to seek for a second bailout. What if eventually Madrid asks for bailout, what effect it would have on EUR/USD?
G.B.: In general, we expect Spain to request a bailout, but we do not see this downgrade as a trigger. Such bailout request is also already anticipated by the market, giving some support to the EUR/USD.
A.L.R.: It is our view that this is one of the main risk events in the market. We think it will be a positive event for the Euro and for EUR/USD, when they ask for help. In our opinion, there are no other significant risk factors, because we do think that the OMT programme, which the ECB has introduced, is going to be relatively effective.
What is your forecast for the end of the year? What will be the main drivers?
A.L.R: We actually believe that over the next three months EUR/USD could hit 1.35, based on the fact that the risk of Eurozone debt crisis becomes smaller and Spain will ask for a precautionary programme. We believe that the market is underestimating how aggressive the central bank is easing monetary policy at the moment. This is not just QE3 from the Fed; this is a start of the new policy framework, which is clearly Dollar negative, in our opinion. This is a form of easing the ECB is not able to follow. Taking that into consideration and judging by the fact that the market still being short on EUR/USD, we think there is an upside potential over the next three to six months and our target is 1.35.