The European Central Bank’s inspired decision to offer almost 1 Trillion Dollars in cheap 3-year loans has impacted markets considerably well so far. The liquidity boost has caused bond yields to fall across the Eurozone and has been especially effective in bringing down yields in the volatile Mediterranean nations; Italian 2-year note yields have fallen by over 6 percent from around 8.12 percent in November; and Spanish notes have declined by more than 3.5 percent from highs around 6.12 percent.
Last week Greece avoided a messy default by acquiring 85.5 percent participation in its private sector (PSI) bond swap deal. The exchange saw Greece’s creditors accept real losses in the region of 74 percent on their investment as a precursor for Athens receiving its 2nd bailout package; most investors preferred to take the haircut rather than face the dire consequences of a chaotic Greek default.
Progress in Greece combined with improved credit flows within the Eurozone has caused German business confidence to rise to a 7-month high. The US economy has also picked up and as a result global financial outlooks have begun to improve.
The Bank of America have improved their June 30th Euro forecast from $1.25 to $1.30 citing ECB President Mario Draghi’s cheap Euro loans, US growth momentum, and a global improvement in economic sentiment as reasons behind their less bearish euro predictions.
JPMorgan Chase & Co., the largest US lender, are more optimistic in their Euro predictions; forecasting a Euro to US Dollar Exchange Rate of $1.34 by the end of June: “The ECB’s balance sheet expansion has been overwhelmingly focused on relieving credit stress, and has had fewer negative impacts in terms of reducing short-term interest rates and raising inflation expectations. That’s why the Euro is remaining stable.”
Strategists at Morgan Stanley also forecast a $1.34 Exchange Rate, up from their $1.27 estimation a month earlier. They also raised their Euro currency prediction for September 30th from $1.18 to $1.24. They see ECB intervention cooling down in the coming months and have reduced their interest rate forecast from a cut of 50 basis points to a drop of 25 basis points in 2012: “We now believe the ECB will not be quite as aggressive with its policy response and we are not likely to see as deep rate cuts as were expecting before.” Morgan Stanley’s currency prediction for the Euro to US Dollar Exchange Rate by the end of 2012 is $1.19.
Currency hedge fund FX Concepts LLC predict a fall to Euro / US Dollar parity in the near future. Their short term forecast sees the Exchange Rate drop to between $1.15 and $1.18 by May. Their cynical approach to the Greek bailout deal mirrors that of many economic analysts who feel that Greece’s fragile growth projections will ensure that the sovereign nation remains a ticking time bomb: “The Euro has reason to go down now more so than ever. This Greek debt deal does nothing other than show that you could lose a lot of money investing in those bonds. Spanish Bonds are looking awful. This is just another one of these pauses for the Euro. The only question is how long does this pause last.”
BNP Paribas SA, however, feel that the Federal Reserve’s pledge to keep US interest rates at zero percent until 2014 is weakening the Dollar more than any other major currency apart from the Yen. They forecast a strong Euro to US Dollar Exchange Rate of $1.40 by June 30th: “The Fed’s commitment to very easy policy until 2014, that’s certainly a factor that’s bearish for the Dollar.”
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