In battle between currency heavyweights, odds favour euro in 2018

MADRID: After trouncing the dollar this year, the euro is set for a repeat performance in 2018, according to forecasters.

Buying the shared currency ranks among next year’s top trades as it’s set to get new momentum from the European Central Bank’s (ECB) gradual unwind of ultra-loose monetary policy. The euro surged 12% for the best Group-of-10 performance against the dollar this year. ING Bank NV is predicting a gain of about 10% in 2018.

The median estimate of strategists surveyed by Bloomberg has the euro climbing to $1.21 by the fourth quarter while options put the odds of attaining that level at more than 80% by then. Another bullish indicator can be found in so-called risk reversals, where calls cost more than puts.

The focus on a more hawkish ECB dominates thinking among bulls, including Canadian Imperial Bank of Commerce. CIBC and ING had the second- and third-best forecast scores among banks and financial firms in a Bloomberg survey for the third quarter of 2017.

ING’s chief European rates strategist Petr Krpata expects currency markets to price in a deposit rate of zero long before the ECB moves.

“That will drive up the euro,” Krpata said. The central bank’s deposit rate, now at minus 0.4%, has depressed the euro since going negative in 2014.

“Rolling back the deposit rate is going to be significant, because a number of central banks and sovereigns have significantly reduced euro holdings because of those negative rates,” said Jeremy Stretch, CIBC’s head of Group-of-10 currency strategy.

Still, markets aren’t currently pricing in an interest-rate increase by the ECB until at least 2019, with the central bank’s asset-purchase program set to run until at least September next year. There could also be disappointment for bulls should eurozone inflation continue to undershoot the ECB’s goal and mute hawkish pronouncements by the central bank.

The US currency posted its biggest decline against the euro this month after the Fed maintained its expectations for three rate hikes next year instead of four, while raising its outlook for economic growth and stoking inflation concerns. The euro was steady at $1.1825 at 10.45am in Frankfurt after gaining 0.7% on Wednesday.