Interview given to Pro Finance by Mitul Kotecha, Head of Global Forex Market Research at Calyon. 31.03.2008.
EUR/USD is in a kind of consolidation after rally which we've seen in recent trading sessions. In your opinion, how big the potential for further upside is?
We still believe that EUR/USD will push higher and certainly 1.60 is likely this week, as the US economic data is continuing to disappoint expectations in contrast with the more upbeat European data. We think we could move above 1.60 towards 1.65, but, however, we don't see the euro sustaining gains there in longer term. Recently among market participants there were talks about possible ECB intervention if euro continues to appreciate. We think it will depend on the pace of the move and whether it will be accompanied by pick up in volatility but for now the risk of intervention is still fairly limited. Speaking about euro prospects we won't call them very positive. A lot of negativity is already in the price in terms of the US, so I think we will see some reassessment of US growth outlook and perhaps more importantly reassessment of growth elsewhere in a world, ant potentially some downside risks to the European growth outlook. At the moment the news we see from Eurozone are fairly upbeat, but I think in the coming months we will expect to see some weakening numbers coming through in Europe, and that should put some downside pressure on euro. Signs of economic weakening will force ECB to change their current hawkish position, and we are waiting for at least two rate cuts (25 basis points each) starting from the end of a second quarter. We think that 1.60/1.65 will be the top of a range for EUR/USD and are looking for it to start declining from the second quarter.
The potential of further US dollar weakness near term on the background of negative bias among investors imply a risk of more pronounced decline of USD/JPY. Is there a risk of intervention?
Further yen appreciation against dollar might force Japanese officials to make an intervention, but, like with Europeans, Japanese see the problem as a dollar problem, and possibility of such action looks quite limited. Dollar is very weak against the yen, but yen on the trade-weighted basis is not extremely strong.
In recent months situation on equity markets was one of a key factors for yen. It looks like the weakness there has a potential to sustain and the example of stock market decline in 2000-2002 imply that the period of negative dynamics could last quite long. How long, in your opinion, the correlation between equity market and Japanese currency will persist?
As I said, we can await a reassessment of growth prospects, which degree will depend on how long and pronounced US recession will be, and I think that for the next few months, at least until the third quarter of this year, the period of risk aversion will continue, and that will be positive for yen. However in longer term we are looking for yen to come under more downward pressure, particularly dollar yen will feel the impact of dollar recovery. Currently rate differentials are being overtaken by risk aversion, but eventually they will come back as an important factor.
Calyon's one, two and twelve month forecasts for EUR/USD are 1.59, 1.55 and 1.45, while for USD/JPY they are 99, 103 and 105.
Mr. Kotecha was interviewed by Dmitry Khrabrov ProFinanceService.com