Hold on to your hats — the euro is heading towards parity with the dollar, according to analysts at Nomura.
That’s due to the widening policy gap between the world’s two most important central banks.
While the Federal Reserve seems very likely to hike interest rates for the first time since 2006 in December, the European Central Bank is still in easing mode. ECB chief Mario Draghi has dropped strong hints in his recent comments that Eurozone could get more rate cuts, or a more expansive QE programme. All else being equal, that split should weaken the euro and strengthen the dollar.
Some investment banks that forecast parity early in the year — Goldman Sachs, for example, projected in March that the euro would fall to parity with the dollar in six months (which it didn’t). Nomura wasn’t among them, but it now believes that it’s coming.
Global head of FX strategy Jens Nordvig says that the 1:1 ratio is coming in 6-9 months, based on the Federal Reserve hiking interest rates and the European Central Bank cutting them.
Here’s a snippet from a November 18 note:
In particular, if the ECB is willing to lower its deposit rate continuously during 2016 (perhaps towards -50bp), we think there is finally a high probability that parity (1.00) will be tested. The most likely timing is mid-2016, as it may take that long for the Fed to deliver its ‘second hike’ and given that market psychology on euro trading has become more cautious than in 2014 and early 2015.
Here’s the full table of forecasts:
The single currency has moved a lot against the dollar since its launch in the 1990s, from below $0.85 in 2000 to around $1.60 on the eve of the financial crisis.
The euro is currently sitting at 1.0675, having slipped from over $1.35 in the middle of 2014.