Desjardins Group, a Canadian credit union that beat the largest banks as the third-quarter’s most-accurate currency forecaster, favors the dollar as U.S. growth outpaces Europe.
Hendrix Vachon, an economist and currency strategist, said Desjardins expects the dollar to gain versus the euro and pound. That puts the firm in line with Norddeutsche Landesbank Girozentrale, which came second in Bloomberg’s survey, and third-placed Westpac Banking Corp.
While the dollar has been hurt by the U.S. government shutdown and congressional dispute over the debt ceiling, Vachon foresees a swift resolution that will help the currency rally. The U.S. economy will grow 2.65 percent next year, compared with 1 percent for the euro area, Bloomberg forecasts suggest.
“The government will find a solution for the debt ceiling, so that will help the U.S. dollar,” Vachon, 32, said in an Oct. 3 phone interview from his office in Montreal. “Our base scenario is a shutdown of two weeks.”
The Bloomberg U.S. Dollar Index, which tracks the currency’s performance against a basket of 10 leading peers, has fallen for the past five weeks, the longest stretch of declines since April 2011. The index slipped to 1,009.13 as of 7:17 a.m. in London today, from a three-year high of 1,054.48 in July on a closing basis. It accelerated declines after the Federal Reserve announced last month it’s maintaining an unprecedented monetary stimulus program.
Desjardins predicts the euro will drop to $1.32 by the end of 2013, in line with the median forecast in a Bloomberg survey of more than 60 analysts. NordLB sees it sliding to $1.28, and Westpac expects it to fall to $1.31. The euro was at $1.3568 today, after reaching an eight-month high of $1.3646 on Oct. 3.
The euro gained 5.7 percent against a basket of nine major currencies this year, the best performance in the group, according to Bloomberg Correlation-Weighted Indexes.
Investors are taking comfort from the 17-nation currency bloc emerging from its longest-ever recession earlier this year, and European Central Bank President Mario Draghi’s pledge last July to do “whatever it takes” to save the euro. The euro-area economy expanded 0.3 percent in the second quarter, the European Union’s statistics office said Sept. 4.
“The market is too optimistic about the situation in Europe,” said Vachon. “A lot of the economic structural problems are still there, there’s a high probability the market will change their views.”
Desjardins sees the pound weakening to $1.58 by the end of this year, compared with a median estimate in a Bloomberg survey of $1.56. NordLB expects the sterling to fall to $1.51, while Westpac is more bullish on the U.K. currency, with a forecast of $1.58, compared with $1.6031 today, according to data compiled by Bloomberg.
Britain’s economy grew 1.3 percent in the second quarter, falling short of a 1.5 percent forecast in a Bloomberg survey of 26 strategists, while the shortfall in its current-account balance was a worse-than-predicted 13 billion pounds ($21 billion), government reports showed on Sept. 26.
“The U.K. economy is showing signs of recovery but they have problems with regard to their deficit,” said Vachon. “Weakness of the U.S. dollar had helped sterling. That factor will fade by the end of the year.”
Fed Chairman Ben S. Bernanke surprised markets on Sept. 18 by saying the central bank would keep printing money to buy $85 billion of bonds each month, which tends to weaken the dollar.
The U.S. currency extended its declines amid a partial shutdown of the federal government because of a dispute over President Barack Obama’s healthcare reforms, and speculation that the nation will fail to re-negotiate its debt ceiling. Federal Reserve Bank of San Francisco President John Williams estimated Oct. 3 that a two-week halt in the government would trim 0.25 percentage point off fourth-quarter economic growth.
“The risks of further weakness in the U.S. dollar are very clear,” Robert Rennie, the chief currency strategist at Westpac in Sydney, said by phone on Oct. 3. Without the Fed paring stimulus, “one of the critical crutches for the U.S. dollar support was essentially pulled from underneath it, and now we have the government shutdown.”
The best forecasters in Bloomberg’s rankings were identified by averaging the individual scores on margin of error, timing and directional accuracy across 13 currency pairs in the four quarters ended Sept. 30. Firms had to be ranked in at least eight of the 13 pairs to qualify for the overall ranking. Fifty-one companies qualified.
Desjardins, which has never made the overall top 10 before, had a score of 64.39, while NordLB was at 63.1, followed by Westpac at 60.93. Founded in 1900, Desjardins is Canada’s biggest cooperative financial group, with $197 billion of assets and more than 5.6 million members, according to its website.
“We have to be humble, we know there’s an element of luck between first and fifth place,” Vachon said.
Vachon said he also recommends investors buy the Mexican peso and sell the Swiss franc “on assumption the U.S. shutdown will be short.” The peso has tumbled about 10 percent against its Swiss counterpart over the past six months, with the impasse in Washington accelerating the slide, according to data compiled by Bloomberg.
Banco Santander SA, Spain’s biggest lender and the most- accurate forecaster in Bloomberg’s rankings of the euro and pound versus the dollar, sees the greenback weakening against both currencies next year. A reduction in Fed stimulus may damp the U.S. currency’s appeal as a haven as investors grow more optimistic about the economy’s recovery, according to Stuart Bennett, the bank’s head of Group-of-10 foreign-exchange strategy. Santander sees the euro rising to $1.42 by end-2014 and the pound climbing to $1.64.
“We still favor a neutral to even a mildly-bearish position on the dollar over the course of the year,” Bennett said in an Oct. 4 phone interview from London. “By this time next year, things are looking a lot better globally. When the world economy is doing well, people tend to shy away from the safety of the dollar.”
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