- The EUR/USD below 1.07 during the second day of the ECB’s QE purchases…
- …ongoing ECB QE and Fed rate hikes could see it reach parity earlier than our current forecast
- Government bond rally continues, but we see a way to go; ECB bought EUR 3.2 bn on Monday
- US labour market tightening, suggests that upward pressure on wages is on the cards
EUR/USD downtrend resumes
On Monday, which was the first day the ECB and national central banks bought government bonds, the euro was flat. This looks to have represented only a temporary pause for breath, with the EUR/USD lurching lower to below the 1.07 level on Tuesday.
Further falls ahead
There are good reasons to think that despite the recent sharp falls, that further declines lie ahead. For a start, the US experience of QE shows that portfolio adjustments and currency weakness continue during most of the period of asset purchases. We are on just day two and the programme will likely last until September 2016. In addition, the Fed will likely start raising its policy rates in coming months.
Parity calling and maybe earlier than expected
Given the chasm opening up between the monetary policy on either side of the Atlantic, EUR/USD will likely head to parity and below. Our current forecasts are 1.05 by the end of this year, 1.00 by end 2016Q1 and 0.95 by the end of next year. However, given the powerful forces at play, there is a rising chance that parity and below is achieved even sooner.
ECB buying leads to continued bond rally
Meanwhile, the strong rally in eurozone government bonds continued. At the same time, curves continued to flatten with longer dated bonds outperforming. We think these trends have a way to go.
Coeure reveals purchases of EUR 3.2bn on Monday
ECB Executive Board member Coeure tried to play down concerns that the central banks would struggle to meet targets as investors were reluctant to sell. He said that ‘at this point there are no signs of issues’. He also revealed that the ECB and national central banks had bought EUR 3.2bn of public sector bonds on Monday, leaving them on track to meet the EUR 60bn target. We think that the central banks will reach their targets but the acute scarcity in the market will force them to pay high prices.
US small business open for hiring
The National Federation of Independent Business (NFIB) index of business optimism was little changed in February, just rising to 98 from 97.9. Of the index components the largest gain was in the percent of owners reporting hard to fill job openings (29% compared to 26%), the highest level in nine years. More firms also reported that they would increase wages in the coming months. Expectations for an improvement in the economy and higher real sales over the next six months ticked slightly lower, while price pressures were muted in February.
US job turnover remains strong
Another report, the January Job Openings and Labour Turnover Survey (JOLTS) released yesterday, showed that the labour market remains on a strong recovery trend. There were 5 million job openings available in January, an increase of 3.4% compared to the previous month. Chair Yellen looks at this report to get a broad picture of the labour market dynamics. Although the growth in hirings (3.5%) and separations (3.4%) edged down in January, they remain above their historical levels. All in all, the job figures continue to show conditions of labour market tightening and suggest that upward pressure on wages is on the cards.