Is EURUSD Heading For Parity?!

OK, hi, Piers. I wanted to grab you because quite a meaningful day in markets is developing. The euro-dollar, which I know you've been calling for parity for quite some time, a number of months actually. I was trying to pin it down. But you've been in that camp. And I've been reading all about this morning. All the other banks obviously caught your research note for your podcast because they're all calling for euro-dollar parity. And it's because— EUR/USD is trading a 1.02 handle, so it's looking somewhat inevitable now. And big breakdown in price. We've got dollar strength across the board. Equity markets are suffering as the Americans return to market. Let me just share my screen and you get a bit of a sense of, of what it is that I'm looking at. The DAX underperforming in the global stock indices, and we'll talk a little bit about the crisis they're facing. Their economy minister said uh, today that Germany is facing in the energy market. It's Lehman Brothers moment. And this comes after the energy giant Uniper has been bailed out by the German government, who are having to intervene. So of course we'll talk a little bit about energy prices. Uh, oil, WTI crude, has also sunk as the Americans have come back into the market, and we're trading around a $103 handle, having traded $108 when Europe came in this morning. So significant move. Lots of calls of recession coming back onto the table. Citigroup out with a note calling for $45 by the end of next year came a day after JP were talking $380 the day before. So no rest for the wicked. Not only am I back from paternity leave, but the Americans are back from their long, long weekend. So Yeah, wanted to get your thoughts, and perhaps we could start with the euro.

Yeah, I mean, it definitely feels like, you know, today, um, the 5th of July, 2022, it does feel already a little bit like one of those days that you'll remember for the year. Um, we'll see if it's one of those days you'll remember for the decade, uh, by the close, but I don't think necessarily it'll be too much more of a monster blowout. But look, it's incredibly— you've got some major major moves to multi-decade lows in some incredibly kind of headline markets that has then fed into just general sentiment. So the euro-dollar is obviously the king of the FX space and has broken, yeah, down below— well, with new lows. This is the lowest we've been since, uh, yeah, 2002, isn't it? And actually, it was— I started trading in October 2002, so we are right now back to the precise euro-dollar exchange rate that I had when I started trading 20 years ago.

Is that a good anniversary, or is that a—

I don't know how I feel about that, but, um, well, it's certainly obviously 20 years we haven't had this price point, and so it's quite— it's very notable, right? And it's not going to stop here. Yeah, we're definitely— I mean, I've been calling parity, but I think it's down. It's odds, it's nailed on here now that we've broken the lows that we had back in 2015. 2015, 2016, which was around 105. Once that's broken, it's now right, we're going to test parity. Um, and look, what's happening is it's the same old story that we've been banging on about for months, right? In the— you've got a big— certainly with this FX pair specifically, you've got a big what we call, well, there's a divergence, right, between central banks, and there's a divergence between the economies and how they're functioning and how they're dealing with post-COVID. There's a divergence when you think about the exposure to Russia-Ukraine, for example. So look, just on the central bank thing first, I mean, the Fed are hiking rapidly and will continue to do so. The ECB always lag, and they've said they're going to hike in September for the first time. I mean, the Fed have been hiking since March, and they hike July.

In fact, they've been saying they're going to move, the ECB, right?

But not— oh, sorry. Apologies. Yes, that's right. So they're going to make a move in July, right? But the closer we get to July, it's like, well, are they going to make a move? Because I think people are starting to think it's already too late to start hiking because now the narrative has moved on beyond the inflation crisis.

Yeah. And the impact, of course, of inflation, like consumer readings that we're getting from a confidence perspective. We have the European Sentex Economic Index out, and that showed investor morale in the eurozone is at basically its lowest level since right in the depth of the COVID initial crisis of lockdown. And obviously the context being 8.6% in June, record inflation in the eurozone, as you said.

Yeah, and I think people are now looking— they're now focused, investors that is, squarely on the economic damage that, A, this well, in Europe, the economic damage this inflation spike is going to have, and it's going to create a recession, and the recession's coming, and the expectations on the timing of that are getting closer and closer and closer. And so it's like, well, look, the central bank— I mean, worst case— well, best case, the central bank can't hike, and we have a recession, and then inflation drops. Because of the dampening of demand that comes with a recession. That is now best-case scenario. Worst— middle ground is like, actually, the central bank do have to hike because inflation stays high. That just makes the recession worse. Worst, worst, worst case, you get a JP Morgan scenario where there's a full-blown monster energy crisis, um, oil goes to the moon, and it obviously just creates— it exacerbates the whole thing, right? But I think back to the euro-dollar specifically, um, the Fed are hiking. They're already hiking. They've hiked 3 times, and each time it's getting a larger hike— 25 basis points, 50 basis points, 75 basis points. And they're going to hike again, and that's been driving dollar strength. And the dollar is strengthening against other currencies, particularly where there's uncertainty whether their central banks are going to be able to hike at all. And the dollar has strengthened against the euro. It's even strengthened even more against the yen, and these are at multi-decade levels. It's strengthening against the pound. The pound's down through the 1.19 handle. That's broken the Brexit low. We've got a very brief blip down to 1.15 that happened off COVID. But otherwise, we're at a 40-year low for sterling against the dollar. So the dollar is uber strong against everything because the Fed's super hawkish, the US are less exposed to the Russia-Ukraine situation, their economy is more resilient, it's recovered better, blah blah blah, and the dollar is king.

So do you think a trigger point to some extent is the fact that these things do often tend to happen as well when there's a bank holiday and you get this return to markets. But in the interim period, particularly over the weekend, there was G7 discussions about a Russian price cap. And I think you and I have talked about this before. It's not that I think that that is even an avenue that they can go down and actually execute on, because the retaliation effect would be so severe on the likes of, say, Germany highly dependent, of course, in the engine room of the eurozone on that gas flow. But just the idea of perhaps a little bit of repricing of the associated risk of supply disruption. Has the market become distracted by the top-level headline inflation figure and kind of everyone was talking about peak, peak Russia-Ukraine, but this really is not quite over it.

Right, yeah, I think it's always hard to pin it right on a very specific thing. I think it's a collection of all of these things together. I think you're right, having a holiday weekend, chilling out, and then you're back, and it's the new— it's the start of the second half of the year. I do think the rally in stocks, uh, what was it, the week beginning the 20th of June, was again a bit of a, a kind of tangent distraction. Stocks went up because of quarter-end rebalancing more than anything else. And I think that again, that probably got misinterpreted as maybe we're at the bottom, but we're not. And, you know, I think these big moves on the FX space has now made people realize, wow, we're at multi-decade levels here. And then people start looking around. This feeds into other markets. Oil down over 5% today. That's off demand downside risk now as we look ahead at a possible recession. You've had a massive sell-off in oil today, and that's down— yeah, back to kind of looking to test that mid-June, um, lows. So yeah, it's just sentiment. It's contagious. It kind of starts in one place, like a headline euro-dollar move breaking to a couple of decade lows, and then that just feeds through to other assets. And then all of a sudden you've got this big move, and then it's a bandwagon, right? Everyone's jumping on and reacting. People are selling now just because everyone else is selling, you know, and it becomes quite behavioral. And so it's definitely one of those days.

And then within all of this, uh, Citi were out with a note which has been in circulation in the last kind of 48 hours, and they were talking about the fact that crude oil could collapse to $65 by the end of the year and in fact slump to $45 by the end of 2023 if demand crimping inflation hits, as Bloomberg were kind of suggesting this morning. Now, a couple things there. Well, for one, what's your initial feeling on that?

My feeling is, come on, um, if they're right, then we're all in trouble, is my feeling, in that the recession is— that will be the worst-case scenario, right?

Yeah. I mean, this is one of the things I was talking about with our um, interns this morning was that the, uh, the devil's in the details whenever you read these bank reports, because more often than not you're reading them secondhand, i.e., via a financial news outlet rather than the actual bank's direct distribution list. So you're not seeing the full report, you're seeing whatever it is that a news agency wants to spin.

Yeah.

And obviously we know they have agendas to generate clicks and so forth, but to give you a bit of color the outlook from Citi is based on the absence of any intervention by OPEC+ producers. And that for me is where this argument ends, right? Because I can't see that ever happening. I don't know why that would ever— I can't think of a scenario where they wouldn't want to step in, at least verbally intervene to stop that from happening. And then actually, when I think about the statement that if a demand crimping recession hits, the actual macro view, the house view of Citi is not a recession.

Right.

So as sexy as it is, it's actually not even their base assumption. So yeah, for sure, I think, look, this is a domino effect. And a lot of those dominoes need to fall in exactly the right place for this to materialize. So is this possible? Yeah, it is possible. Is it likely? No, I don't think it is likely. Yeah, um, so agree. Just, just a word to the wise of how to interpret that if you're a student, you're not used to looking at that type of head— that type of headlines. But look, that was it, Piers. I just wanted to jump on, get a quick take from you. I know, I know you're busy, so we'll leave it there. Um, but yeah, feel free if you're watching this on YouTube to like and subscribe to the channel. Super appreciate that. And I'll be back on my normal macro week ahead outlooks as of next week. Um, been away for a short while but back in business. So, uh, yeah, thanks, Piers, and see everyone next time.

Yep, see you later.