The strong monetary policy response of the European Central Bank to the coronavirus pandemic and the prospect of a fiscal union have eliminated historical tail risks for the euro currency, according to Sam Zief, global head of currency strategy at JPMorgan Private Bank.
JPMorgan has recently updated its common currency target price to $ 1.15 by the end of 2020, and projects a move to $ 1.20 in 2021. The euro was trading at around $ 1.14 on Thursday morning.
Zief attributed the euro’s momentum largely to the ECB’s response and progress towards a possible fiscal union for EU member states, in light of the European Recovery Fund proposal to be debated at the Council of the EU this weekend.
“Global investment managers, global central bank asset managers have always had to assign a risk premium to the euro, given the potential for some breakdown risk at some point in the future, and we believe that these forceful responses that we are watching really take that off, “Zief told CNBC’s” Squawk Box Europe “on Thursday.
The ECB increased its Pandemic Emergency Purchase Program by 600 billion euros ($ 686 billion) to 1.35 trillion euros in June. Meanwhile, the EU announced a € 750 billion recovery fund in May as it seeks to shore up the bloc’s economy from the consequences of the health crisis.
Zief suggested that as global investors, who have been “overweight” to US assets and the dollar at the expense of the euro, begin to rebalance to “neutral,” the market is likely to see some “really significant flows into the euro. “
“We are already starting to see that, but there are definitely legs behind it, and that is what will take us higher from here,” he projected.
Zief added that the pillars supporting the strong dollar case had been knocked down, with US rates falling and the US dollar largely considered overvalued by most metrics. Traditionally, traders have tended to prefer currencies from countries with high interest rates, as national assets offer higher returns.
“There really was only one thing that underpinned it, and that was the superior performance of growth for the United States relative to the rest of the world,” he said.
“Cyclical risks appear to be improving, US rates have now completely collapsed to essentially zero with the rest of the world, and the Federal Reserve is no longer shrinking its balance sheet, it is expanding it, along with everyone else And all of this With global growth starting to pick up, it tends to be an environment that sees the dollar sell out, “Zief explained.
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