FX comment: The first euro-to-parity prediction
I was never much of a trend-follower (frequently to my cost), so I like to point out brave contrarian calls when I see them. Failing that, I’ll settle for an outrageously ambitious prediction about a trade for which there is already some consensus.
A note from currency research firm Black Swan Capital falls into the latter category. Built around an article by Martin Wolf in Tuesday’s Financial Times, the gist is that elimination of fiscal deficits by the Club Med nations is a near impossibility. In Wolf’s words: “Germany’s structural private sector and current account surpluses make it virtually impossible for its neighbors to eliminate their fiscal deficits, unless the latter are willing to live with lengthy slumps. The problem could be resolved by a eurozone move into external surpluses. I wonder how the eurozone would explain such a policy to its global partners? It might also be resolved by an expansionary monetary policy from the European Central Bank that successfully spurred countries and also raised German inflation well above the eurozone average.”
Black Swan predicts just that: “Near zero interest rates and quantitative easing by the ECB.” However, true QE by the ECB is no easy task, given the fragmented nature of the eurozone’s bond markets. And it is scarcely conceivable – January’s trade figures notwithstanding – that German exports could contract so severely as to overcome inflation paranoia.
Black Swan reckons the resultant US over EZ yield differential could lead to EUR/USD going “to par against the dollar or possibly well beyond.”