As the euro plunges to 20-year lows, BCA Research says it may be time to step in, arguing that the risk/reward now favors the single currency.
The euro EURUSD hit $0.98640 against the U.S. dollar on Sept. 6, before bouncing back to trade at $0.99605 on Friday. It has been hurt by concerns about an economic downturn, soaring inflation and an energy crisis as Russia cuts off gas supply as the region heads into winter.
However, BCA notes that European gas inventories have reached 84% of capacity, which is above the 80% target that the European Union set for November 1. Also, meteorological forecasts suggest that Europe will experience a warmer-than-normal winter, which will cut the use of heat, "likely making gas rationing unnecessary."
The government response to the crisis, meanwhile, also bodes well for the euro as "currencies fare best in loose fiscal/tight monetary environments. This is what Europe faces over the coming months, as governments boost income support for households and businesses, while ramping up spending on energy infrastructure and defense."
The European Central Bank has also started hiking rates and is unlikely to deviate from its tightening campaign as it faces rising inflation expectations. This has helped move interest rate differentials in favor of the euro since mid-August, BCA said.
The research firm said that it went long the euro against the dollar last week when it hit $0.99 and is targeting $1.06 by the end of 2022. The biggest risk to its view is a hawkish Federal Reserve, however BCA said that it expects U.S. inflation to ease over the coming months, before reaccelerating in the second half of 2023.
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