Sunday 24 June 2018

Euro and sterling now heading for parity, Morgan Stanley forecasts

A currency exchange sign on the border near Newry. Irish exporters will be hit if sterling continues on its downward trajectory Photo: Bloomberg
A currency exchange sign on the border near Newry. Irish exporters will be hit if sterling continues on its downward trajectory Photo: Bloomberg
Donal O'Donovan

Donal O'Donovan

The pound and euro will hit parity by the end of next year, US investment bank Morgan Stanley forecast on Friday.

The weak pound is a boon to many UK-based exporters, giving their products a competitive edge on world markets. However, as a major importer of food and raw materials it also drives up costs for businesses and households inside the country.

A further swing lower for the pound will hit Irish exporters to the UK, driving up the price British customers must pay for products or eroding margins.

To date, despite high profile casualties in low-margin sectors including mushrooms, Irish industry has largely shrugged off the increase in Brexit-linked currency volatility.

Predictions that the euro and pound will trade one-for-one for the first time in the currency's 18-year history have mounted since the UK voted last year to leave the European Union in a referendum.

For the period ahead, Morgan Stanley analysts said the strengthening euro adds to a push towards parity.

Euro-area pushback against the populist movements that have threatened to destabilise the European Union will help bolster the euro for years, according to Andrew Sheets, chief cross-asset strategist at Morgan Stanley.

The US investment bank raised its forecasts for the euro against the dollar as well as sterling, projecting it would reach $1.25 early next year, and trade one-for-one against the pound for the first time.

This is a "multi-year call" for a stronger euro, Andrew Sheets said in an interview with Bloomberg TV yesterday. "What markets will focus on is this idea that the core of Europe, France and Germany, are working toward a stronger European Union, making a push toward reform that we haven't seen in a number of years," Mr Sheets said. "That's structurally bullish for the euro."

The common currency has soared 12pc against the dollar this year amid improving economic growth and as fears of a populist revolt against the European Union diminished when pro-establishment politicians won elections in France and the Netherlands. A vote in Germany next month is giving more cause for optimism as polls suggest German Chancellor Angela Merkel will comfortably win a fourth term.

Increasing demand from pension and insurance funds from Switzerland and Japan will add fresh momentum to the year's best performing Group-of-10 currency in the coming months, as investors scale back hedges and increase positions in euro-denominated assets, Morgan Stanley strategists including Hans Redeker wrote in a research note published Thursday.

Traders who adopt trend-following strategies have ridden this year's euro rally, followed by speculators who in recent months have built up the biggest net-long positions in six years. Now Europe's institutional investors have a slew of good economic and political reasons to buy assets priced in euros closer to home, according to Morgan Stanley.

Meanwhile, the bank is negative when it comes to the pound, and not only because of its bullish outlook for the euro.

It reckons sterling is poised for another downward march amid weak growth, low inflation-adjusted yields and increased political uncertainty as it exits the European Union.

The euro advanced 0.3pc to $1.181 yesterday, putting it on course for a fifth week of gains, the longest stretch since January. The pound weakened 0.1pc to $1.297.

The pound headed for its second straight weekly decline against the dollar and euro, weighed down by UK data which continued to undershoot forecasts. (Additional reporting Bloomberg)

Irish Independent

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