▶ As chal­lenges in the eu­ro­zone re­cede, an­a­lysts ex­pect eco­nomic growth to drive up gains for the cur­rency

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For those think­ing of investing against the re­silient dol­lar, the dilemma has been what to ac­tu­ally buy in­stead. The an­swer, for some, is at once ob­vi­ous and brave: the euro.

While the euro-dol­lar pair is the most ac­tively traded in the world, the prospects for Europe have not ex­actly stood out in re­cent times. The euro area has been con­tend­ing with a sag­ging re­gional econ­omy, the fall­out from global trade dis­putes and risks stem­ming from Brexit un­cer­tainty. It is also home to large swathes of negative-yield­ing debt.

All that has acted as a drag on the euro, which has lagged be­hind most of its ma­jor peers this year. But as some of these chal­lenges re­cede, the cur­rency is once again be­com­ing an at­trac­tive op­tion for some buy­ers, and Oc­to­ber saw it post its best month against the green­back since early 2018. Some in­vestors are say­ing that grad­ual im­prove­ment in growth and progress in US-China talks could fan risk sen­ti­ment and drive the euro up.

“A pe­riod of rel­a­tive sta­bil­ity in trade ne­go­ti­a­tions” should buoy the cur­rency, said Francesca For­nasari, a port­fo­lio man­ager at In­sight In­vest­ment, which has $844 bil­lion (Dh3.1tn) in as­sets un­der man­age­ment. There are also “ex­pec­ta­tions of an in­creased shift to­wards fis­cal pol­icy as a means to sup­port growth in Europe”.

So far this year, it has not been a good idea to go against the dol­lar, even amid ex­pec­ta­tions it would weaken. The dol­lar has con­sis­tently bounced back after soft pe­ri­ods and reached a more than two-year high in early Oc­to­ber. Be­fore last month, the euro fell in eight out of nine months.

Still, some of the year’s ma­jor head­winds for the euro are eas­ing. Both Chi­nese and US of­fi­cials have spo­ken pos­i­tively about on­go­ing ne­go­ti­a­tions to reach a pre­lim­i­nary trade deal, which could fur­ther stim­u­late risk ap­petite and re­move the haven bid for the green­back. Fur­ther­more, the Brexit dead­line has been pushed back to Jan­uary 31, re­mov­ing the threat of a no-deal di­vorce this year. New Euro­pean Cen­tral Bank Pres­i­dent Chris­tine La­garde re­cently sounded a stronger tone than her pre­de­ces­sor on gal­vanis­ing fis­cal stim­u­lus to fa­cil­i­tate growth.

JP Mor­gan Chase strate­gists led by Paul Meg­gyesi say they are “ex­plor­ing op­por­tu­ni­ties” to go long the euro ver­sus the dol­lar, but re­main cau­tious in part be­cause of the eco­nomic malaise. The group is en­cour­aged by data show­ing the euro area posted a record an­nual sur­plus on its ba­sic bal­ance – a mea­sure that in­cludes cur­rent ac­count, net eq­uity and net for­eign di­rect in­vest­ment flows.

“This mas­sive ba­sic sur­plus should cush­ion the euro against future eco­nomic dis­ap­point­ment,” the strate­gists wrote in a note on Novem­ber 1.

Eu­ro­zone eco­nomic data has been stronger than ex­pected re­cently, with the Citi

Eco­nomic Sur­prise In­dex for the re­gion well off a bot­tom reached on Oc­to­ber 10, though the gauge con­tin­ues to show that re­ports are un­der­shoot­ing fore­casts. A rebound in Ger­man fac­tory or­ders added to signs that the euro-area econ­omy has passed the worst of its re­cent trou­bles.

Price pat­terns also sup­port the idea of a euro re­cov­ery, ac­cord­ing to Cit­i­group tech­ni­cal strate­gists in­clud­ing Tom Fitz­patrick.

The euro-dol­lar pair in Oc­to­ber com­pleted a bullish out­side month, mean­ing that month’s trad­ing range was wider than the pre­vi­ous month’s, with prices clos­ing at a higher level, the JP Mor­gan strate­gists said. On the other hand, the Bloomberg Dol­lar

Spot In­dex and the US Dol­lar In­dex both posted bear­ish out­side months, which sug­gests broad green­back weak­ness, they said.

Citi rec­om­mended an out­right long po­si­tion in the euro ver­sus dol­lar on Novem­ber

1 at $1.1146, with a stop loss at $1.1025. The trade has an ini­tial tar­get of $1.14 or higher, but could hit or ex­ceed $1.18 by year-end, Mr Fitz­patrick said.

Mean­while, Stan­dard Char­tered strate­gists Ge­off Ken­drick and Steve Eng­lan­der say the mar­ket may have seen the lows in the cur­rency pair, ac­cord­ing to a note pub­lished last week. They rec­om­mend a long po­si­tion in the euro ver­sus the dol­lar at $1.1090. The trade has a tar­get of $1.1500 and a stop loss at $1.0950.

Once the Chi­nese growth ma­chine starts to kick in again, ex­ports from the eu­ro­zone will rise, sup­port­ing the euro SE­BASTIEN GALY Nordea In­vest­ment

And sen­ti­ment among op­tions traders is hov­er­ing near the most bullish for the euro against the dol­lar since July for time pe­ri­ods rang­ing from three months to one year.

The shared cur­rency still faces chal­lenges and not ev­ery­one is con­vinced its time to shine is near. Data this week showed that the 19-na­tion euro re­gion’s man­u­fac­tur­ing sec­tor re­mained firmly in con­trac­tion, even as a pur­chas­ing man­agers’ in­dex rose. Job losses ac­cel­er­ated and or­der books de­te­ri­o­rated.

The In­ter­na­tional Mon­e­tary Fund last week warned Europe to pre­pare emer­gency plans for an eco­nomic slump, as risks to the re­gion’s out­look spread and mon­e­tary pol­icy has all but ex­hausted its arse­nal.

The re­gion’s econ­omy has been “hurt” by the US-China trade war and its man­u­fac­tur­ing and inflation data re­main slug­gish, said Anne Mathias, global rates and FX strate­gist at Van­guard.

Ms Mathias said Van­guard is still short the euro in its ac­tive funds where it has cur­rency po­si­tions, adding that she has a “neu­tral to bullish” stance on the green­back.

It does not help that Europe’s yields are among the most negative in the world. Yield-hun­gry in­vestors are at­tracted to US as­sets as the Fed­eral Re­serve pauses its rate-cut­ting cy­cle, with Trea­sury rates surg­ing last week be­fore drop­ping on Wed­nes­day.

Yet, the el­e­ments sup­port­ing the shared cur­rency mit­i­gate the head­winds, ac­cord­ing to Se­bastien Galy, macro strate­gist at Nordea In­vest­ment.

He fore­casts that the euro should climb to $1.14 to $1.16 in the first half of next year.

“Once the Chi­nese growth ma­chine starts to kick in again, ex­ports from the eu­ro­zone will rise, sup­port­ing the euro, while the Chi­nese sell in­com­ing dol­lars to buy eu­ros,” he said. “That should drive” the shared cur­rency higher.


Some of the year’s ma­jor head­winds for the eu­ro­zone are eas­ing

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