During this week we have seen how the ECB president (Mario Draghi) has said that he has no hurry in diminishing its QE in the Eurozone. After saying that, the Euro lost some strenght against other currencies as this it’s seen (despite saying that the Eurozone economy is healthy) as a lack of economic strenght in the Euro area, as it is facing right now, two major concerns:
- The Deutsche Bank problem, that is affecting the EU right now, as the bank is not performing well despite its efforts to cut expenses, but the major problem is facing the ban right now are their legal issues, as they won’t be able to pay a settlement higher than ~$6B from the USA without asing for help or issuing new shares (remember that they have €5.5 set aside to pay those legal settlements and they are facing another penalty from Russia, that nowing the political situation between the EU and Russia since the Crimea ‘war’ I think it won’t be a small one).
- Te Brexit, that will be negotiated next year and, as tensions will be high during those negotiations, I expect both the Euro and the GBP to fall against other major currencies such as the USD or CHF (that will serve as a safe heaven).
We can also see, that the Eurozone economy is still weak against the US in terms of inflation, GDP and unemployment despite the QE conducted by the ECB. And, as the ECB objective is to maintain inflation at close to a 2% (or at least positive right now) and having to face those two problems (the DBK is too big to fail for Europe and if despite the ECB QE they are in a so bad situation I can’t imagine what would they do if the ECB cuts it) I expect Draghi to hold the QE at least until 2017 summer.
On the ohter hand we have the USD and the FEd that has been warning about a rate hike for a while and depite that, they havce used any excuse available during their last meetings to avoid increasing its interest rate. In my opinion, posposing a hike until next year it will be seen as a lack of confidence on the US economy and, as the global economy is not strong and investors are becoming more resilient to invest and risk averse posposing the hike can drag the US economy and index more than a 0.25 points hike (that’s what they will do if they do it).
So, as a conclusion, I’m short in the EUR/USD due to the weakness and problems that it has to face the Eurozone economy in the near future that will avoid a QE cut and the likeliness of a rate hike from the fed in December due to the negative impact that I think it would have if the pospose it.