Majority of traders see euro-US dollar parity as stagflation threat rises: Survey

The Russia-Ukraine war and the supply chain crisis will cause the euro to end up level with the greenback. PHOTO: REUTERS

SANTIAGO (BLOOMBERG) - Foreign-exchange traders are set to bludgeon the euro anew as the war in Ukraine and the supply chain crisis ramp up stagflation risk - driving the single currency to parity versus the US dollar for the first time in nearly two decades.

In the view of 60 per cent of respondents to the latest MLIV Pulse survey, the euro will eventually end up level with the greenback, with a small majority of more than 400 participants betting it will then recover to US$1.15 (S$1.60).  It traded at about US$1.05 as of 1pm in Singapore on Monday (May 9), near its weakest since early 2017.

Yet it is a close call. Some 48 per cent of those polled, who include economists and portfolio managers, project fresh losses to US$0.95 - a notably more bearish outlook than Wall Street investment banks.

MLIV readers' concerns underscore the European Central Bank's policy headache as it seeks to cool rampant price pressures without killing off the business cycle, with 40 per cent of respondents fearing a recession in the region more than inflation and the same proportion fretting over stagflation.

With its proximity to the Russia-Ukraine conflict and dependence on cross-border trade, Europe is at the epicentre of global concern over rising prices and slowing economic growth. The euro area grew just 0.2 per cent in the first quarter, as Italy contracted, France flatlined and expansion in Spain slowed. Factory output and new orders have slumped, and business confidence is evaporating.

As the European Union's dispute rages with Russia over gas payments, there is a lack of consensus among respondents as to which side is set to suffer more. While 51 per cent said the Kremlin would ultimately fare worse, 49 per cent cited Europe as the principal loser.

When asked what would be the best trade to position for a possible recession this year, the most popular answer was to short the euro, followed by exposure to energy, through stocks or commodities. Going long bunds and cash came next, followed by gold and the dollar.

"If Ukraine gets worse, I would assume that Europe goes into recession," JPMorgan Chase chief executive Jamie Dimon told Bloomberg TV on May 4. "It may take a couple of quarters, but I would assume that."

Economists tracked by Bloomberg have cut their 2022 eurozone growth forecast to 2.8 per cent from 4.2 per cent at the start of the year. Yet the risk of a recession is rising after Russia halted the flow of gas to Poland and Bulgaria. Businesses and consumers in Europe are facing a squeeze as prices rise, while China extending lockdowns blights the global growth outlook.

There is huge uncertainty about the outlook for the region, as there is for the outcome of the war, Societe Generale CEO Frederic Oudea told Bloomberg TV on May 6. "Our central scenario, the central scenario of our economist, is more of a soft landing of GDP (gross domestic product) than a recession," Mr Oudea said.

The median currency prediction of professional forecasters is for the euro to rally to US$1.12 by the year end, with no bank surveyed by Bloomberg currently predicting parity. ABN Amro Bank did briefly make the case in March but revised its call higher a few weeks later. Nomura Holdings previously warned a win for far-right candidate Marine Le Pen in France's election could drive the currency to parity.

Citigroup strategists recently recommended three-month euro-dollar parity puts, while the options markets imply a roughly 35 per cent chance of that happening over the next six months.

The euro's weakness has been partly predicated on dollar strength, but now that US Federal Reserve chair Jerome Powell has downplayed the prospect of a 75-basis-point hike, the US currency may start to look overbought.

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