Where does the euro go from here?
Despite German efforts to put the brakes on the rising single currency, there is still room for it to trade higher
After a nearly straight-line run that took the euro from 1.06 on April 7 to 1.2016 on August 29, the European unit fell back to 1.1885 as of 1 pm.
Although the Germans want to eliminate the negative interest rates that are punishing their savers, the Merkel government and the Bundesbank worry that overshooting on the way up might trigger new economic problems in the European periphery and require a new round of bailouts. Only about 1 of 9 Germans own equity directly or via pension funds, compared to 1 of 2 Americans.
Germans invest for interest, not upside, and yields on German government bonds are negative through the 7-year maturity, along with bank deposit rates. A negative yield of 0.5% with inflation of 1.5% means that bank depositors lose 2% a year, not sustainable in an aging economy where an increasing proportion of the population depends on savings. Negative rates have to go. The question is when.
As Asia Unhedged reported earlier today, ECB officials (no doubt German ones) told Handelsblatt that the ECB would be cautious about reversing quantitative easing, given the sharp rise in the euro. ECB sources (presumably the same ones) were quoted by Reuters and other media to the same effect, which meant that the Germans wanted to send a clear signal that the euro was rising too fast. German officials have been saying that they don’t mind a euro at 1.25, but worry that it might overshoot to 1.40. So they tapped the brake pedal. We still expect the Euro to trade higher towards the end of this year or early 2018.