Forecasts about the euro’s exchange rate against the dollar and other currencies are made even more difficult than usual by the increasing danger that Greece will have to exit the eurozone.
Nobody really knows what would happen in such a scenario, although there are voices who claim that this possibility has been discussed for such a long time that it has begun to be priced in by the markets.
Despite the difficulty of anticipating what the single European currency’s trajectory will be for the rest of the year and beyond, there is some certainty regarding the European Central Bank’s policy, and this is what is being taken into account when making forecasts.
The Federal Reserve has also sent a clear message to markets that it plans to raise interest rates gradually starting in September, which adds some predictability to the euro/dollar exchange rate. The euro strengthened after the announcement but is expected to fall back.
Among fund managers surveyed by Bank of America Merrill Lynch in its monthly survey carried out before the Fed’s announcement, 72% believe the euro will depreciate against the dollar in the next year.
Half of the respondents out of a sample of 94 fund managers with $211 billion in assets under management believe the depreciation of the euro will be modest, with the single currency falling to parity or near parity.
Confidence in the ECB’s quantitative easing and its effects on the exchange rate is so high that only 5% of fund managers believe the euro will appreciate over the period.
However, this forecast is based on 43% of the fund managers expecting a positive outcome to the Greek talks, with 42% predicting that Greece will default but remain in the eurozone and only 15% expecting it to leave.
Fears are rising, however, and this is shown in the fact that cash allocations increasing. The average cash level for European fund managers was 4.9%, up from 4.4% and hitting a six-year high.
Interestingly, this triggers a contrarian “buy” signal for equities, as the Bank of America Merrill Lynch’s cash rule says that when the average cash balance rises above 4.5% the buy signal is triggered, while the contrarian “sell” signal is triggered when the balance falls below 3.5%.
The fact that global fund managers are bracing for greater volatility and risks in stock markets over the next three months is illustrated by the fact that protection taken out against corrections in equities has increased to a net -25%, a record reading in the survey.
For contrarians, the trades of the month are long resources and staples and emerging markets, and short discretionary goods, banks, eurozone equities and Japanese equities.