Change to 1.15 in CIBC Euro-Dollar Forecast
“No one has made money trading current accounts in foreign currencies since the 1970s. Capital flows are more important than trade flows for currency analysis.”
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- Reference rate EUR / USD at publication:
- Place: 1.1802
- Bank transfers (indicative guide): 1.1390-1.1480
- Specialist money transfer rate (indicative): 1.1705-1.1730
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Strategists at CIBC Capital Markets aim for a further decline in the euro-dollar exchange rate (EUR / USD), saying that the fundamentals continue to favor the greenback.
Bipan Rai, head of foreign exchange strategy for North America at CIBC, said the euro should be higher and the US dollar weaker due to the contrasting fortunes of the US current account and the zone euro.
“One of the weirder arguments I’ve heard to soften the EUR / USD decline is a change in ‘the current is negative for the US and positive for the Eurozone, so the EUR / USD must appreciate, right? “.
“Our answer – No. Forget what your 101 macroeconomics textbook says and join the real world,” Rai says.
the current account is a measure a country’s or currency bloc’s transactions with the rest of the world, in particular its net trade in goods and services, its net income on cross-border investments, and its net transfer payments.
A current account deficit occurs when a country’s trade value of the goods and services it imports exceeds the value of the products it exports.
the manual says a growing current account deficit results in an increase in the supply of a country’s currency in the foreign exchange markets.
A deficit could therefore lead to a fall in the external value of the currency.
The reverse would be true for a country with a current account surplus.
But, for the euro-dollar exchange rate, the US current account deficit and the euro area current account surplus don’t matter, Rai argues.
“The ZE has a current account surplus due to underinvestment in northern countries (mainly Germany) and weak aggregate demand in the periphery. Not because the ZE has become super-productive,” says- he.
The euro area current account surplus increased to € 285 billion (2.5% of euro area GDP) in the four quarters up to the first quarter of 2021, according to the European Central Bank.
The United States, for its part, saw its current account deficit widen by $ 20.7 billion, or 11.8%, to reach $ 195.7 billion in the first quarter of 2021, according to the statistics of United States Economic Analysis Office.
As for the US deficit, Rai says it may not be that big given that he’s actually had primary surplus income for decades.
“Current account statistics do not capture the exports of intellectual property, technological know-how, etc., but they capture the returns of these factors of production,” he said.
In addition, the US deficit has no financing problem.
Typically, if a country runs a current account deficit, it needs to attract foreign investment to ensure that the currency remains stable or appreciates.
CIBC says T-bills and U.S. assets still attract most foreign investors because of their attraction to yield, safe haven, and reserves.
“Finally, no one has made money trading currency current accounts since the 1970s. Capital flows are more important than trade flows for currency analysis,” says Rai.
Regarding the euro, Rai argues that the rules of the European Monetary Union (Maastricht, Stability and Growth Pact) as well as outdated fiscal policies (again Germany) are ultimately what prevent the euro from appreciate and the external accounts to rebalance.
The eurozone rules mentioned above place an effective straitjacket on the fiscal policies of its members, ensuring that they maintain disciplined budgets.
“Until this is changed, monetary policy will remain relatively looser and you cannot count on a structurally stronger euro,” Rai said.
The European Central Bank is expected to confirm next week that it will maintain ultra-flexible policy parameters, including quantitative easing and maintaining record interest rates.
This contrasts sharply with political expectations for the United States. Federal Reserve, which appears poised to advance the timetable for a first rate hike amid signs the US economy is in turmoil.
For a foreign exchange market focused on diverging central bank policies, this could lead to a further decline in the euro-dollar.
CIBC Capital is a seller of the EUR / USD exchange rate and targets the 1.15 zone.
“If, and once, it happens, we will re-evaluate,” Rai said.