The resilience of the euro after last months European Central Bank meeting reflects concerns that other main central banks could pursue further easing measures, but negative rates and weak demand for eurozone assets do not bode well for the single currency.
The ECB last month downgraded its 2013 GDP growth forecast to minus 0.3% from a positive 0.5% and predicted that consumer price inflation would fall below its 2% target in 2013 and 2014. The Eonia futures curve subsequently shifted to price-negative overnight interest rates in the eurozone for the first time ever.
Chris Turner, head of FX strategy at ING, says the prospect of negative overnight interest rates should be a reminder that eurozone money-market funds will not be the place to invest in 2013.
This is because data show weak demand for eurozone assets, where portfolio flows are a substantial driver of euro pricing.
"Flows into eurozone money-market funds were a key driver of euro-dollar strength in 2009," says Turner. "Net money-market outflows could weigh on the euro in 2019."
Furthermore, if eurozone growth does come in at minus 0.3% in 2013, flows into eurozone debt and equities look unlikely as well.
"We expect eurozone residents will increasingly have to look outside the eurozone for returns in 2013, which will weigh on the euro," says Turner.
Of course, there looks to be little to choose between the dollar, euro, yen and sterling heading into 2013, with each leading central bank looking for a weaker currency.
"However, the macro/monetary mix looks quite negative for the euro in the early part of 2013 and thats why we are still bearish," says Turner. He forecasts $1.20 as the euro-dollar rate at the end of the first quarter of 2013.
While that news is unlikely to be welcomed at the Bank of England, the Swiss National Bank will be watching the development on the eurozone rate just as avidly.
Figures last month showed that the SNB did not have to intervene to maintain the SFr1.20 euro-Swiss franc floor in November amid reduced concerns about the viability of the eurozone project. Increased worries about Europes economy could change that, and put the SNBs currency strategy back in the spotlight.