Correlations in exchange rates show the euro is moving in the opposite direction to the yen more consistently than at any time since the common currency’s 1999 debut. It’s a sign that some of the money flowing out of the yen because of the BOJ’s policies is flowing back to Europe to prop up the euro.
Speculation that Draghi will have to bow to pressure from markets for a reduction in borrowing costs is being stoked by economic data. The Ifo institute in Munich said today its index of Germany’s business climate, based on a survey of 7,000 executives, dropped to 104.4 from 106.7 in March.
A composite index of euro-area services and factory output based on a survey of purchasing managers in both industries by London-based Markit Economics held at 46.5 for April, indicating a contraction, a report yesterday showed. Similar German PMI data also showed a contraction.
“This is not a level that suggests economic growth or a stronger recovery,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt, who expects the euro to end the year at $1.28. “The data was pretty bad. Now Germany is also in a range where you wouldn’t expect growth in the near future.”
Gross, the co-chief investment officer at Newport Beach, California-based Pimco, manager of the $289.1 billion Total Return Fund, agrees with those predicting a rate cut, even if he’s not confident it would have the effect exporters desire.
“Expect an ECB cut soon but will it lead to real growth? Doubtful,” Gross said in a posting on Twitter yesterday. “Euro needs to go down. Sell euro.”
Morgan Stanley analysts said in a report today they were preparing for “a resumption of the major downtrend” for the euro against the dollar, a change of strategy.
The euro is overvalued by 5.1% against the dollar based on an index developed by the Organization for Economic Cooperation and Development in Paris that uses relative costs of goods and services. That’s less than the Norwegian krone and Australian dollar, which are about 36% too strong. The euro is 0.7% too strong against the yen, the gauge shows.
Even a rate cut won’t curb the euro’s strength against the Japanese currency, according to Michael Sneyd, a currency strategist at BNP Paribas SA in London.
“Beyond next week’s ECB meeting, where we are expecting a cut, the euro should start to perform well,” Sneyd said in phone interview yesterday. He predicts the common currency will strengthen to 140 yen by year-end.