Euro Dollar Breaks Below 1.20 as Investment Professionals see Eurozone QE in 2015


Draghi and the euro exchange rate complex

The euro exchange rate complex (EUR) enters the first full trading week of 2015 firmly on the backfoot.

The euro to dollar exchange rate (EUR/USD) has broken below the psychological level of 1.20 - a nine year low - and the breach could well prompt further selling in the medium term.

The current declines are said to largely centre on Greece:

"Reports out of Germany that Andrea Merkel is willing to see Greece leave the Eurozone amidst panic over the nation’s potentially volatility-inducing election at the end of January caused the euro to hit 9 year lows against the dollar. The Eurozone has been threatened by the chance of an election victory for left-wing Greek party Syriza, who would set the proverbial cat amongst the Eurozone pigeons with their wish to severely renegotiate Greek debt," says Connor Campbell at Spreadex.

Longer-Term Outlook Undermined by Quantitative Easing Expectations

While Greece remains a key concern for the euro at the present time, the belief that further monetary assistance to the Eurozone economy will be offered by the European Central Bank (ECB) is driving a longer-term decline in the shared currency.

Indeed, 27% of investment professionals expect a programme of full quantitative easing to be implemented in the Eurozone by the end of Q1 2015 suggests the latest findings from ING Investment Management’s Risk Rotation Survey.

The future of Europe is amongst investors’ primary concerns as they look ahead to 2015, with 60% of respondents citing a Eurozone crisis as a significant risk to their portfolios.

Meanwhile, one in eight (13%) respondents strongly believe that the Eurozone is heading for a deflationary environment similar to that experienced by Japan in recent years. A further 50% of respondents believe that this is ‘moderately likely’, while only 23% of the panel believe that this will not be the case.

Valentijn van Nieuwenhuijzen, Head of Strategy Multi-Asset at ING Investment Management (ING IM), says:

“The past quarter seems to have continued in the same vein as Q2, with underlying concerns affecting investors’ appetite for risk.

"However, whilst Abenomics was the primary focus of attention earlier in the year, the future of the Eurozone has taken centre stage in recent months. It is clear that there are very real concerns of a prolonged period of deflation which could – if investors are correct – twist Draghi’s arm when it comes to implementing a Sovereign QE programme in early 2015.

"Whether this will be realised remains to be seen, but without a more US-like flexibility in thinking and commitment to doing ‘whatever it takes’ to reach the desired objectives, it will be a long time before Europe can be considered ‘healed’.”

Other than a potential Eurozone crisis, investors cited interest rate rises (50%), Chinese hard landing (47%) and a fiscal shock (37%) as the most significant risks posed to investment portfolios, whilst Japan’s consumption tax increase(2) and inflation were viewed as the least significant threats.

van Nieuwenhuijzen continues:

“All of these factors appear to have led to a phase of risk consolidation amongst investment professionals, with 40% of our panel stating that they have maintained their positions in terms of risk over the past six months. European investors appear to be the most bullish when it comes to risk, with 32% having increased their appetite in recent months, compared to 29% across all markets.”

Looking ahead to the next three to six months, equities continue to be the most favourable asset class with regard to risk versus return, being selected by 46% of respondents. Alternatives are a close second, selected by 45% of respondents, while real estate completes the top three favoured classes with 29%.

Looking at geographical regions in terms of which offer the most attractive risk versus return profile, investors believe the best opportunities lie within the US (34% said this), followed by emerging markets (25%) and the UK (14%).