Wednesday, March 11, 2015

Is Euro heading for parity with the US dollar? | Kiwi is also suffering

Yesterday the selling of the Euro continued in earnest, on the day following the implementation of Eurozone Quantitative Easing. The ECB does not do things by half, and it is now in the process of hoovering up government bonds from across the Single Currency zone, with the noticeable exception of those that have Greek issuance (and visceral fears of Greek contagion on the back of noises from that country about a possible referendum on Euro membership are not helping the currency either). Consequently, bond yields have plummeted, with some going into negative territory.

This overall trend is not likely to change soon. Eurozone QE will be around for some time. Now that they have started the process, Mr. Draghi and his colleagues at the ECB can be expected to give it plenty of time to work its magic, the ultimate aim of which is to increase inflation. One tried and tested way to do that is to reduce the value of the region’s currency.

The Euro seems to be heading to a one-to-one valuation with the US dollar, and there is no reason to believe that it will stop there. If it does go below parity, it will be the first time this has happened since shortly after its introduction for normal use in January 2002.

While the reduction in the value of the Single Currency is likely to draw in buyers of European equities from outside the zone, which will require Euro purchases, these are also likely to be hedged, which will mitigate against any tendency for a rise in equities to bolster the Euro, at least in the medium-term. In the meantime, corporate bodies and institutions from across the globe are rushing to borrow in Euros, which now has the potential to become the global funding currency of choice, given the high likelihood of core interest rate rises in the US in the near future.

Kiwi is also suffering

In New Zealand, the Kiwi (NZ dollar) has been hit by something of a double whammy. It is one if the very few prominent currencies against which the Euro is rising at the moment (as can be seen from the chart above, higher highs and higher lows are in evidence in the EURNZD pair since Thursday of last week).

This has come about (1) because of a threat, apparently by animal rights activists, to contaminate milk products with the same poison the NZ government uses to control the spread of certain wild animals. New Zealand’s most important exports come from the dairy sector. (2) The second element in the fall of the currency is a renewed determination on the part of the Reserve Bank of New Zealand (RBNZ) to reign-in the inexorable rise in house prices, the success of which measures will open the door for a cut in interest rates there, which are amongst the highest in the developed world. The Forex market is reacting accordingly.

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