Ulrich Leuchtmann, Head of FX Strategy at Commerzbank AG, on the Euro performance
What kind of performance do you expect from the Euro after European leaders meeting this week?
I think the outcome of this meeting will be all in all supportive for the Euro, because lots of concerns about possible end of the bailout for Greece have already been priced into the Euro. What we will see this week is that the meeting’s outcome will probably be more constructive. Therefore, this might be a mildly positive surprise for the Euro, and hence it should support EUR/USD and other Euro exchange rates.
There is speculation that the ECB will try to cap bond yields. What do you think about this initiative?
First of all, this is a rumour; therefore I have no information if it has any content in it. However, if it was true and if the ECB really installed such a mechanism, I think this would be problematic for the Euro in the medium to long run, because the ECB then would bring itself into a corner, from which it could hardly escape. Simply the ECB would be in a situation where it would be difficult for them to stop the bond-buying programme. Therefore, they would depend on policies to bring the periphery economies back into the situation where market-determined yields would be lower than their ceiling. The ECB would be further dependent on the success of economic policies in Eurozone. This is a difficult situation for the central bank. Thus, I think this would clearly be a burn for the Euro.
Some analysts are bullish on the Euro and they expect it to reach 1.30-area by year’s end. Do you share this positive outlook?
No, I do not share it. I think these activities by the ECB might be somewhat meaningful, but this would be negative for the Euro in the longer term, because this is an action which could contain the Eurozone’s debt crisis only for a while. Nevertheless, it would be for the price of the ECB bringing itself into a difficult situation in the medium to long run. Also the other alternative is the politicians would move closer to a situation, where Europe would be best described as a liability union. This would also be negative for the Euro, because it would question the Bund’s safe haven status, which so far has been the largest argument for global investors to hold Euro denominated assets.
What is your forecast for short and long term?
I think in the short run the Euro will remain under moderate pressure. Therefore, I expect something around 1.20 by year’s end. I think the pressure on the Euro will increase, because if the Bund’s safe haven status would be questioned, if the ECB becomes more and more active and starts to monetize periphery debt to a larger degree, then the effect of the crisis on Euro exchange rate might accelerate. I expect something around 1.13 by the end of next year.