- Euro Is Nothing But a Flow Show and Analysts Are Getting Worried
The euro is on a tear, U.S. investors are snapping up European stocks — and traditional theories to justify the shared currency’s spirited advance have broken down, as investors luxuriate in a climate of low volatility.
That’s the market landscape as painted by Deutsche Bank AG strategist George Saravelos. Given the parallels, he suggests caution after the euro’s 7 percent rally against the dollar this year.
“Something strange has happened to the euro in recent months,” Saravelos wrote in a client note Wednesday. “Almost all traditional drivers that usually ‘explain’ the price action have broken down.”
The bank’s currency correlation model — which includes factors such as interest-rate differentials, the relative performance of equity markets, and spreads of southern European government bonds — is flashing red.
Correlations between the euro’s rolling three-month performance against the dollar and other such factors were last at current subdued levels in early 2014 and 2007. That suggests unhedged equity inflows from foreign investors piling into European equity and bond markets — thanks to better-than-expected economic data, and easing political risk — have driven the currency’s recent outperformance, according to Deutsche Bank.
“Near-term, it suggests that there may be an underlying flow story that is impervious to other market drivers and is supportive of the euro,” Saravelos said. “Medium-term, the current ‘decorrelation’ is usually associated with periods of very low volatility and would suggest caution in extrapolating recent euro strength.”
As such, the German bank, the world’s fifth-largest currency trader by market share according to a Euromoney Institutional Investor Plc, reckons the euro will fail to break out against the top end of its 1.05 to 1.15 per dollar range, as traditional currency drivers re-assert their influence.
Risks to the currency’s bull run are rising: The euro fell as much as 0.67 percent Wednesday after a Bloomberg report on a potential switch in the European Central Bank’s inflation outlook signaled the prospect of a dovish outcome in tomorrow’s policy decision.
The counterpoint comes from Morgan Stanley, which this week raised its target for the single currency citing “material upside surprises in recent growth data, positive political developments and a view that investment inflows to the eurozone will continue.”
Morgan Stanley projects 1.16 per dollar by the second quarter of 2018, a 20 percent upside from its previous forecast, compared with the median projection of 1.13, according to analysts surveyed by Bloomberg.
Linking currency moves to capital flows isn’t straightforward when markets move in lockstep, but an April study by Deutsche Bank suggests currency traders should follow flow data closely: It concluded that outsize inflows into exchange-traded equity funds can predict moves in a number of liquid currencies, including the euro.
Saravelos’s note of caution also finds support from Jens Nordvig, founder of Exante Data, a New York-based research firm.
“Fundamental models for EURUSD, based on rate differentials, would have predicted a relatively stable exchange rate in recent months,” Nordvig, who was ranked No. 1 strategist by Institutional Investor for five years through 2015, in his previous capacity as head of currency research at Nomura Holdings Inc., wrote in a client note. “In our analysis, this ‘euro residual’ is tied to certain flow forces, which have turned euro bullish lately.”
Naira Continues Downward Trend on Black Market, Trades at N465/$
Naira Extends Decline on Black Market, Exchanges at N465/$
Naira extended its decline against the United States dollar on Friday as scarcity amid devaluation persists.
The local currency lost N2 against the US dollar from N463 it traded on Thursday to N465 on Friday. Its lowest in almost three years.
Similarly, the Naira depreciated by N3 against the British Pound from N562 on Thursday to exchange at N565 on Friday.
While against, the European common currency, the Nigerian Naira lost N1 from N505 it was sold on the back market on Thursday to N506 on Friday.
The local currency has been on a downward trend since the news of foreign exchange unification broke out about two weeks ago. This coupled with 5.54 percent devaluation from N360 official Naira-US Dollar exchange rate to N380, compounded Naira woes.
On the Investors and Exporters’ Forex window, the Naira appreciated by 25 kobo or 0.06 percent against the US dollar to trade at N386.50 on Friday.
Activity on the window, however, improved from $11.96 million traded on Thursday to $25.19 million Friday.
Naira Declines Against Pound, Euro After Devaluation
Naira Plunges Against Euro and Pound After CBN Adjusts Official Exchange Rate
Following the devaluation of the Naira by the Central Bank of Nigeria, the local currency declined against the British Pound and the Euro single currency on the black market.
The Naira lost N4 against the British pound to trade at N562 from the N558 it traded on Wednesday.
This decline continues against European common currency as the Naira lost N1 from N504 exchanged on Wednesday to trade at N505 on Thursday.
On the Investors and Exporters (I&E) Forex window, the Naira lost 0.06 percent or 25 kobo against the US dollar to trade at N386.75 after plunging to as low as N390 during the trading hours.
Activity on the I&E window declined by 86.4 percent from $103.37 million traded previously to $11.96 million as traded are reportedly stay off the market.
The FMDQ Group, who manages the I&E Fx window, on Wednesday adjusted its CBN’s Naira-USD official exchange rate from N361 on Tuesday to N381 despite the central bank maintaining N360/$ on its official website. Indicating that the apex back has officially implemented the N380 but without an official announcement, likely due to backlash — especially after the CBN has repeatedly said the nations have enough reserves to support the economy and blamed speculators and hoarders for the wide exchange of the local currency.
Naira Slides to N463 Against US Dollar on Black Market
Naira Falls Against Dollar, Trades at N463 on Black Market
The Nigerian Naira declined against the United States dollar on the black market following the decision of the Central Bank of Nigeria (CBN) to adjust the nation’s official foreign exchange rate.
The local currency depreciated by N2 against the US dollar from the N461 it exchanged on Wednesday to N463 on Thursday after the news of CBN adjustment became known.
The apex bank had adjusted the official foreign exchange rate from the N360 previously used for the US dollar to N380 due to the recent changes in macro fundamentals of the nation.
This is the Naira lowest exchange rate on the black market in almost three years and highlighted the nation’s precarious position especially when the escalating inflation rate of 12.4 percent is factored in.
On Tuesday, United Capital Plc said given current economic situation that the official exchange of the Naira is expected to slide to N430 to a US dollar by the end of the year.
The pan-African investment banking and financial services group said “On the exchange rate, we believe the odds are in favour of a further naira adjustment, which may take the official rate to N410/$ to N430/$ by year-end.
“However, we believe the Central Bank of Nigeria will continue to defend the value of the local unit for as long as it can.”
It went on to predict that the economy will shrink by 2.69 percent in 2020, down from the 2.3 percent growth predicted earlier in the year.
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