Just like last year, the euro has slowly been slipping compared to the dollar in recent weeks. A year ago, the currency world was captivated by the steps the ECB and the Federal Reserve would take. Traders thought Mario Draghi would ease the monetary policy in December 2015, while a start was made on a number of increases of interest in the US. This caused the euro to gradually drop from $1.14 mid-September to less than $1.06 late November 2015.
In recent weeks it's felt like déjà vu. Since mid-September, the euro glided nicely from $1.12 to just over $1.08. In December 2015, the euro suddenly shot up again when Draghi’s measures went less far than currency traders had predicted. Many parties who had already chosen the position that the euro would drop further were wrong, causing the euro to quickly increase to $1.10. However, the dollar seems unstoppable this year.
Three reasons for the dollar’s advance
There are three reasons why the strong recovery of the euro seems unlikely in the final weeks of this year. Many parties are less likely to bet heavily on a further decrease of the euro, after their bad experiences last year. The total position speculators are betting on, regarding a decline of the European currency against the dollar, is about 40% smaller than twelve months ago.
A second reason why there is little chance of a surprise rally of the euro, is that expectations of the position Draghi will take in December are much lower. Last year, traders counted on a decrease of interest and a new gamut of stimulating measures. This time, the market doubts whether the ECB will make a decision about extending the programme to buy (government) bonds and other assets in a few weeks. The chance of getting disappointing ECB news is much smaller than it was last year.
The path to parity is open
The low volatility in the exchange rate between the euro and the dollar is a third indication that there will not be a sudden rate change. Last year, the market priced a significant premium — the so-called implied volatility premium — hedging against all of the uncertainty it was facing. Despite concerns about the American presidential election, the premium is almost 25 per cent lower than in the autumn of 2015.
Everything indicates that an increase of the dollar against the euro will not suddenly change during the final weeks of the year. Additionally, it is impossible for the Federal Reserve to delay a new increase in interest for much longer. According to polls by the news agency, Bloomberg, by now more than 70 per cent of economists are predicting an increase in interest before the end of the year. And 20 per cent expect an increase in November. In my opinion, the dollar will continue its advance, clearing the way to parity between the euro and the dollar before the end of 2017.
For more information:
Laurens Maartens
Laurens@nbwm.nl
T: +31 (0)20 57 82 434
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1012 JW Amsterdam
The Netherlands
Laurens Maartens is a currency expert with the Dutch Payment and Exchange Company (www.nbwm.nl). He started his career with Swiss bank UBS in 1998. He has been employed by several parties, both nationally and internationally, since then. He provides commentary for current currency developments in newspapers, on websites and on the radio. In addition, he gives lectures and trains entrepreneurs in the field of currency management. He urges participants to choose especially simple and inexpensive currency products. This column reflects his personal opinion. This information is not intended to constitute professional investment advice nor is it meant as a recommendation to make certain investments through the Dutch Payment and Exchange Company plc.