Exchange rate forecasts: EUR to weaken even should bond market tensions be resolved warn Wells Fargo

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Category: Exchange Rates

Published on Monday, 18 June 2012 11:12

Written by Will Peters

The latest FX Express Monthly from Wells Fargo has warned that we are likely to see further declines in the euro, even in the event of peripheral bond yields stabilising.

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To see the exchange rate forecast table, please visit our IMT site, access is issued via this Facebook entry path.

It must be noted that the tone of the currency note from Wells Fargo is largely positive:



"We still believe a more constructive scenario is possible and, indeed, probable. If a resolution of Spanish uncertainty is complemented by no euro exit for Greece, markets can look with more optimism to the European Leaders’ summit on June 28–29. Given the euro’s extended positioning, favorable news would suggest scope for a near-term relief rally to $1.2800 and, possibly, above."

That said, there are other issues, besides Eurozone bond yields and market uncertainty to contend with.

As the note says:

"At the same time, the fundamental conditions for that bounce to turn into a sustainable euro rally are lacking in our view.

"We see further easing as likely once some of the political uncertainties are addressed. Furthermore, Europe’s external balance position has become increasingly vulnerable.

"The most recent available data suggest capital outflows increased in Q1, with the basic balance (the sum of the current account, as well as foreign direct and portfolio investment flows) flipping to a (small) deficit for the first time since early 2009. Thus even with a gradual easing in European bond market tensions, we see the euro returning to a gradual weakening path before too long."

For now though markets will continue to fixate on the issue of Spanish and Italian bond yields.

Commenting on the renewed risk-aversion is Ishaq Siddiqi at ETX Capital:

"Financial markets are back under pressure today, with European stock indices and the euro surrendering earlier gains despite the pro-bailout win in Sunday’s Greek elections. Spanish 10-year bond yields soared back above the 7% mark, while the Italian 10-year stands above 6%.  Across Europe, core European stock markets ease off highs, while the Spanish IBEX and FTSE MIB push sharply lower. With little in the way of economic data, volatility is expected to remain high as investors cut exposure to risk.
 
"We are seeing a continued bout of risk aversion, as the early euphoria over the pro bailout win for Greece starts to fade, and instead, concerns grow about the implementation of a viable coalition by the New Democracy party.  The main worry here is that a new coalition government will face difficulty in working out a plan to stimulate economic growth and agree on reforms without continued intervention by the troika."