here is an interesting article that outlines that global
fixed income managers are overweight euro denominated assets
and may be net sellers.
Also the tax reformation and the elimination of the capital
gains tax will lead to a massive restructuring but
it will take years for these benefits to flow through to
the euro.
the Japanese Q2 GDP economic numbers due on sept 10th should
also be stronger.
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Euro/dollar to 0.8400 ?
24-Aug-00 02:37 ET
A couple of weeks ago we tried to take a contrarian view on the euro but that position looks increasingly untenable as the slim odds for a rebound have since almost totally evaporated. A major change of heart followed after publication of this week's German IFO July survey. The overall index fell for the second consecutive month and confounded widespread expectations of a rebound in the wake of parliamentary approval of the much trumpeted tax reform package. Although other German economic data are still broadly supportive of the economic recovery they are all backward looking. The IFO survey stands apart as being pre-emptive having successfully called the last two cyclical GDP troughs.
A pause for breath
In the bigger picture the longer term trend in the IFO index is still undoubtedly higher. The fall to 99.1 in July takes it back to the rising twelve month average. To that extent the recent falls may yet turn out to be a pause for breath before heading higher once again.
Sweeping Tax Cuts
Indeed with the euro seemingly on course to set new record lows, the export outlook should maintain strength. Meanwhile, the domestic outlook looks set to show more conclusive signs of a pick up once implementation of Germany's tax reform package gets underway. The corporate tax rate will be cut from around 52% to 39% from January 2001 whilst the top rate of income tax will be cut from 51% to 42% over the next five years. The biggest measure, concerning the abolition of capital gains tax, is set to herald a massive spree of corporate restructuring. Over the next five years it is estimated some $29 billion will be cut from tax bills. Added to this both France and Italy looks set to follow suit by implementing their own sweeping tax cuts.
But Process Will Take Years
Its is all to easy to forget the importance of these measures but the upshot is that they should go some way to reversing the fortunes of Europe and thus the euro. France, Germany and Italy combined attracted less foreign investment as a percentage of GDP than any other European nation according to the OECD with Germany and Italy ranking last. The temptation to create jobs abroad because of high taxes should therefore be reversed once these reforms begin to filter through. The trouble is that this process will take years rather than weeks to come about. So, whilst there are few doubts about the longer term prospects for European growth there is little to cheer about over the remainder of the year.
The Poor Cousin.
With no more US rate hikes likely until next year, if at all, US stocks could well stabilise and move back into higher gear. That suggests the prospective H2 slowing will not moderate enough to significantly change the prevailing landscape favouring dollar inflows. Added to this the Japanese economy is possibly shifting into higher gear. Although there is much contention over the sustainability of Japanese growth it seems likely that Q2 GDP, to be reported on September 10, will show a good positive result. Recent comments by LDP official Kamei underscored that a move to dollar/yen 103 could be tolerated. With both the dollar and yen looking reasonably well placed the euro is once again left as the poor cousin.
Fund Managers Overweight Euro's
The Merrill Lynch survey of 125 global fixed income fund managers provided further cause for concern . It suggested long term fund managers were heavily overweight euro denominated assets and, given the prospect of rising interest rates, there would be little buying interest. Apart from that the report also noted that the euro was being undermined by investment outflows from European equity markets along with a wave of European takeovers of foreign companies.
Technicals
Finally the technical backdrop remains negative. The weekly MACD indicator recently reverted back to sell state from within negative territory and the three and eight week moving averages are aligned and falling. Withstanding a modest correction towards the 0.9300 area, a test of the all time lows at 0.8850 is really only a matter of time. Losses to the eighteen month channel base around the 0.8400 area could ultimately be in store. |
