For traders happy to keep betting against the euro next year, the yen looks the best horse to back, according to some of Japan’s currency experts.
Uncertainty over European Central Bank policy and ongoing political strife will further undermine the common currency in 2019, while the dollar has its own issues as investors question global growth and the Federal Reserve’s scope to keep raising interest rates, they argued. This leaves the yen as the most attractive of the three majors, they said.
“Political, fiscal and downward growth pressures are focused in Europe and will weigh on the euro, potentially sparking risk aversion moves away from the region,” said Koji Fukaya, chief executive officer at FPG Securities Co in Tokyo. “When global factors weaken risk appetite, the euro-yen will face the widest price action between the three majors. It may fall toward 120.”
The euro has struggled against its two main counterparts this year, having fallen about 5% against both the dollar and yen, due to lacklustre regional economic growth and Italian political risks. The single currency was at ¥128.62 yesterday, down from its 2018 high of ¥137.50 set in February.
Mizuho Bank predicts the euro will fall as low as ¥118 next year, a further 8% below current levels, amid wariness European Parliamentary elections in May could strengthen anti-European Union momentum and concern slowing eurozone growth could prevent the ECB from moving further toward policy normalisation.
The yen will benefit as it is the weakest of the three majors based on real effective exchange rates while the dollar is the most overvalued and thus has scope to fall, said Daisuke Karakama, chief market economist at Mizuho. Euro-yen may even fall as low as 115, he said.
“Political issues will keep capping the euro, but since the dollar is coming off from higher levels, the euro will be relatively stronger among those two currencies which are both expected to weaken next year,” Karakama said. Prospects for the US currency, which has rallied against the euro this year, have been clouded by rising speculation over a potential pause in Fed tightening next year. Central bank Chairman Jerome Powell opened the door for such a move last month when he said US interest rates were “just below” the neutral range.
Concern about a global economic slowdown raises the chances of the Fed ending rate hikes in the latter half of 2019 and should also prevent the ECB from raising borrowing costs next year, said Yuji Kameoka, chief foreign-exchange analyst at Daiwa Securities Co in Tokyo. The yen tends to strengthen when a slowdown in global growth boosts risk aversion, which could push euro-yen as low as 120 next year, Kameoka said. “But the euro won’t necessarily weaken against the dollar because the dollar’s drop will likely be bigger given that US yields are higher,” he said.
The yen will have its own reasons for strengthening, said Minori Uchida, head of global market research at MUFG Bank Ltd in Tokyo. Wariness over Japan-US trade talks set for early 2019, further policy tweaks from the Bank of Japan and rising real interest rates amid receding inflation expectations may push euro-yen as low as 121 toward the end of 2019, he said.