© Carolin Hecht
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What we are currently observing is that the pressure on the Euro is not subsiding, and thus we are seeing summit after summit. After short risk unveils there is always see a new low in EUR/USD. At the last meeting we have seen that those decisions made have not convinced the market. The crucial problem remains—now we have rather the discussion of whether we can extend the rescue package in place rather than whether the Eurozone countries budget policies are sustainable. We definitely see this very worrying tendency that the budget deficit targets for the peripheral countries are loosened. Spain, for example, is now receiving aid for the banking sector and at the same time they get less stringent budget deficit target for this year.
Another example is Italy, which now claims that it may have easing funding in the future. This erosion of confidence that we have seen, is due to the fact that the fiscal situation of the peripheral countries is unsustainable. Moreover, the monetary union is not a fully fledged fiscal union, and that lacks effective punishment measures for the countries that do not meet their budget deficit targets. Still at the time Germany is rejecting fully fledged fiscal union. This what the peripheral countries claim, but which Germany at the moment is refusing. We also have to wait what the German Constitutional Court will say concerning the current plan of ESM funding.
This is all dragging the Euro down, as there is no real alternative at the moment. We still think that the way for the Euro is down. And the only way we could see the EUR/USD inching up significantly would be that the Fed announces QE3, which is still on the table. We have had now rather moderate labour market reports in recent months, by they did not really bring the new impulse and no real impetus whether the QE3 is now justified or not. The Fed at the moment is turned to wait-and-see attitude, and we still need to see more data publication in order to judge whether they will come around with QE3 or not. This could be the risk for the US Dollar, while being the way in which EUR/USD could recover. But at the moment we are expecting that this will not happen, and we will see continuing EUR/USD down movement.
Do you think that EUR/USD may reach parity any time soon?
No any time soon. This would be the risk scenario, if the pressure on the peripheral countries would be accelerating or rising significantly, you would see sooner rather than later escalation of the crisis again without the necessary rescue packages in place. The comment from Italian Prime Minister Mario Monti was very worrying due to the fact that for Italy the current rescue mechanism would not be sufficient. If they would need help, then in the current set I would not fight for Italy to receive the funding needed. What would you then expect would be EUR/USD collapse due to the fact that Germany, which is now already funding the largest part of European rescue mechanisms, would then have to provide even more rescue funding for the peripheral countries. Then there would be probably the movement that international investors would leave even bonds which would then lead to the Euro collapse. Because at the moment it is not necessary to leave the Euro in order to switch from peripheral countries to some other investment. Investors can save bonds or you can switch to Finnish bonds, for instance. Thus, there is no need to leave the Euro in order not to invest in peripheral countries. This is why we are still seeing the Euro on the relatively stable level, given the fact that we are in such a mess in Eurozone. The moment when this will end would be the moment when EUR/USD could collapse to parity. This is nothing we are seeing as an acute risk for the coming month.
What is your forecast for the Q3 and Q4?
We expect EUR/USD at 1.24 and 1.22 for the Q3 and Q4 respectively. This is based on the scenario that we will see rather muddling through of the Eurozone crisis. What is behind that is that the ESM will stand in late summer, and there will be no significant escalation of the crisis until the year end, but there are risks attached. The risk scenario for the mid to longer term would then be EUR/USD falling more pronounced than our forecast are currently pricing in.