The global trade war is not expected to throw up too many winners among currencies, but the euro could be one.
Europe’s common currency is set to climb back toward US$1.2, a level not seen since May, as the US substitutes Chinese imports with those from the euro bloc, Deutsche Bank AG said.
The Canadian dollar and Mexican peso will also be major beneficiaries after the world’s largest economy yesterday imposed higher duties on US$200 billion of Chinese goods.
“The US-led trade war on China may end up benefiting the euro disproportionately by diverting trade toward Europe,” George Saravelos, co-head of foreign-exchange research at Deutsche Bank, wrote in a note to clients. “It ultimately reflects a more favorable view of the European versus China cycle.”
Should the euro appreciate, it would mark a change in fortune for a currency that has been hurt in recent months by the cautious pace of European Central Bank (ECB) policy normalization and financial outflows from the region’s equity markets, Saravelos said.
The specter of global trade tensions also hangs over the bloc — negotiations with the US are still ongoing — but Deutsche Bank’s base case is for a deal to be reached, he said.
The euro was at US$1.1770 as of 10:19am in London, having dropped to US$1.1301 last month, a one-year low.
At the same time, there are signs that ECB policymakers are becoming increasingly hawkish, with ECB Governing Council member Ewald Nowotny saying that officials should “ask if it’s really sensible” to lock in record-low interest rates for so long.
Money markets are currently pricing the first 10 basis-point increase in the deposit rate since 2011 for October next year.
“There is material scope for repricing as the inflation outlook continues to improve,” Saravelos wrote. “The pieces are falling into place for a recovery in” the euro.
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