Wednesday 28 September 2016

Euro bears tamed even as Goldman Sachs sees euro drop to parity

Netty Idayu Ismail

Published 06/09/2015 | 02:30

Euro bears are putting their calls for the single currency's drop to parity against the dollar on the backburner. Goldman Sachs Group Inc. isn't wavering.

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Analysts have raised their year-end forecast of the euro by 2 cents to $1.07 during the past month, according to the median estimate of data compiled by Bloomberg. The common currency has been the second-best performer of 16 major peers during the period as a rout in emerging markets prompted investors to seek safer assets. Goldman Sachs still predicts the euro will weaken to 95 cents in the next 12 months and slide to 80 cents by end-2017, once risk aversion abates.

National Australia Bank Ltd. boosted its year-end estimate for the currency to $1.05 from parity as the threat of a Greek exit from the euro area receded. The Melbourne-based lender also pushed back its prediction for a U.S. interest-rate increase to December, from an earlier projection for two moves this year that would begin in September.

"We're still thematically bearish on the euro," said Ray Attrill, global co-head of currency strategy at National Australia Bank in Sydney. "We're just not quite as negative."

Last week, the single currency was at $1.1230 in London after climbing to a seven-month high of $1.1714 on Aug. 24 as China's unexpected devaluation of the yuan spurred a slide in emerging markets. The euro has rallied 7 percent from a 12-year low of $1.0458 set on March 16.

The euro has benefited as investors responded to the China shock by ending carry trades, though this is likely to be temporary, Goldman Sachs analysts including Robin Brooks, chief currency strategist in New York, wrote in a report dated Aug. 24. In carry trades, investors borrow in a currency with relatively low interest rates to buy assets where yields are higher. The trades tend to depress the currency that is used for funding.

There's a 6.5pc chance the euro will weaken to parity by year-end, down from a probability of 18 percent at the end of June, according to data compiled by Bloomberg.

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