We have revised our projections for the euro (A) downwards in the short/medium term, (B) while leaving the profile unchanged in the medium/long term….…
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We have also revised slightly downwards our projections for sterling against the US dollar in the short term.
EUR – We have revised our projections for the euro (A) downwards in the short/medium term, (B) while leaving the profile unchanged in the medium/long term. Our 1m projection has changed from EUR/USD 1.25 to 1.20. In this case, the revision intends to incorporate (i) the set of risks tied to Greece’s potential exit from EMU, (ii) the uncertainty that in the meantime could generate market tensions, and a partial flight of assets in euros, (iii) and increasing concern over Spain’s situation and, more in general, over potential contagion effects. We have lowered our 3m projection from EUR/USD 1.30 to 1.27. The potentially negative factor on this time horizon is the risk of a deterioration of the macro picture in its strictest sense, in particular in terms of growth, even regardless of the debt crisis (which in any case has restrictive effects as a result of fiscal consolidation).
The 6m projection is down from EUR/USD 1.35 to 1.30. The factors listed above for the 1m and 3m projections will continue to apply, but our choice not to indicate a lower exchange rate level than 1.30 is explained by the uncertainties tied to the presidential elections in the United States at the end of the year, with the risk of the federal debt ceiling being breached, and the resulting need to put in place fiscal restriction measures which could no longer be procrastinated.
On the other hand, our 12m and 24m projections remain broadly unchanged at EUR/USD 1.35, as (i) we assume this to be the most delicate phase (also given the lack of precedents) of the debt crisis, and therefore that action will start to be taken now, so that in the medium/long term the situation should prove better on the whole than it is at present; we also assume (ii) that, as has generally been the case in the past year, international investors will continue to purchase “core Europe”, with Germany at the fore, considering that – contagion issues notwithstanding – the debt crisis is a much more serious problem for peripheral euro area countries, and relatively manageable for the structurally sounder and more virtuous (in comparative terms) “core” countries.
As regards short/very short term risks, in order to approximately quantify downside – in case of “maximum” crisis escalation – EUR/USD 1.18 may be taken as a downside target, based on the behaviour of the exchange rate during the first Greek crisis (plunge from 1.45 to 1.1877 EUR/USD between January and 7 June 2010).
GBP – We have also revised slightly downwards our projections for sterling against the US dollar, from GBP/USD 1.54 and 1.52 to 1.51 and 1.53, on a 1m and 3m horizon respectively. This revision was mostly prompted by the positive correlation between the GBP/USD and the EUR/USD, which increases in phases such as the present, in which the euro area crisis is mounting. Also, economic data releases in the UK have been especially poor in the past two weeks. Yesterday the preliminary Q1 GDP estimate was revised downwards, placing growth contraction at -0.3%from -0.2% q/q, and drawing a very poor picture indeed of private consumption. By no coincidence, the Bank of England has decided not to rule out the possibilità of a further expansion of the APF, although the move was not made at the May meeting. The implications on the pound’s cross rate against the euro should be to support resilience above EUR/GBP 0.8000. However, this does not rule out the possibility of the exchange rate making a foray into the EUR/GBP 0.79 area in the short term, although such movements would be temporary and of limited scope.
JPY – The yen still hasn’t managed to drop back to USD/JPY 80, and is lingering in the 79 area. Tensions generated by the euro area crisis justify the Japanese currency’s downside resistance, but should not compromise the expected depreciation beyond the very short term.
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