The euro tumbled to as low as $US1.0714 earlier, the lowest level since April 2003.
Tuesday’s loss has pushed the euro deeper into bear market territory as it is now down 23% from its May 2014 high near $US1.4000.
What are the reasons for the euro’s weakness?
In a new research note, Deutsche Bank’s Robin Winkler and George Saravelos reiterated their ‘Euroglut’ concept. Simply put, it argues that the euro-area’s gigantic current account surplus, combined with the European Central Bank’s quantitative easing (QE) program, and negative interest rates will continue to cause the euro to tumble.
Winkler and Sarvelos say the region, which is currently a debtor to the world, must become a net creditor to the world with its international investment position needing to reach +30% of GDP (currently -10%) before the current account surplus is sustainable. This can only happen with net capital outflows of at least 4 trillion euros.
So, what does this mean for the euro?
“[W]e continue to expect broad-based euro weakness,” they wrote. “European outflows have been even bigger than our initial (high) expectations over the last six months, so we are revising our EUR/USD forecasts lower. We now foresee a move down to
1.00 by the end of the year and a new cycle low of 85cents by 2017.”
So it appears the sell-off in the currency is far from over.
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