Currency strategists, traders differ on future of euro in 2019

Bloomberg

Currency strategists are convinced that 2019 will be the year of the euro. Money managers and traders aren’t buying it.
Morgan Stanley, Credit Agricole SA and Toronto Dominion Bank are all calling for the common currency to surge next year as investors shift focus away from an overvalued dollar. That’s not a view shared by Janus Henderson Group Plc and Allianz Global Investors, which are positioned for weakness in the euro on skepticism stemming from the political and economic risks surrounding Europe.
The view of the currency analysts is a reprisal of their call for 2018, which saw the euro quickly surge to a four-year high, only to end the year on a whimper as a dovish European Central Bank and political risks in Italy and France put paid to hopes of bullishness. Money markets are betting that those very risks will prevent policy makers from raising borrowing costs before 2020. Toronto Dominion Bank, however, reckons the ECB will lift rates sooner rather than later, raising rates twice next year to take the deposit rate to zero percent.
“It’s a punchy call, yes, but we think there is a very strong desire to get out of emergency monetary policy as soon as possible,” said Ned Rumpeltin, European head of foreign-exchange strategy at TD Bank. “The euro continues to enjoy a solid external balance.”
The bank forecasts the euro will strengthen to $1.27 next year. That compares with a median 2019 year-end forecast of $1.20 in a Bloomberg survey. The euro traded around $1.1400, having slid about 5 percent against the dollar in 2018.
Investors in the money markets continue to be skeptical about the euro’s prospects. Contracts based on the Euro Overnight Index Average now see the first ECB rate increase in April 2020, compared with December 2019 at end of June. One-year risk reversals, a gauge of market sentiment, indicate that currency option traders are positioning for the euro to fall further against the dollar.
The skepticism of the markets stems from a number of political hurdles that Europe faces next year, including parliamentary elections that could see a decline in support for traditional parties. At the same time, the biggest political crisis of 2018 in the region — Italy — may still have further to run, with speculation that the nation could once again host elections next year. The ECB will also choose a new president after incumbent Mario Draghi steps down in October.
“We could have snap elections in Italy in March, we have EU parliamentary elections in May, we have the new EU commission in the summer and then we have the new ECB president in the autumn,” said Neil Dwane, a money manager at Allianz GI, which manages 524 billion euros.