HSBC’s Bloom: The euro is stuck

By Rebekah Tunstead | 24 September 2019

The immediate outlook for the euro doesn’t look set to improve, according to David Bloom, head of FX research at HSBC.

“We've just recently seen the ECB cut rates and do some fancy QE or whatever it was. They are getting desperate. If you saw the numbers today, they are absolutely awful,” said Bloom at the Sibos conference in London this week. 

“The euro is stuck. It is stuck firmly in a range, it is stuck in 1.10, 1.15 - we have argued that for a long time. We are at the bottom of the range now roughly at 1.10. I’m not looking for any recovery anytime soon in the euro,” he said.

On September 16, Philip Lane, a member of the executive board of the ECB told a conference: “incoming information is signalling a more extended slowdown in euro area growth dynamics than previously expected”, but this was mainly due to “external developments”.

For Bloom, Lane’s remarks are unsurprising.

“The eurozone continues to surprise to the up-side because all of you are always expecting a recovery. ‘Yes, we must be at the low point. Yes, it must be getting better.’ So, you keep getting disappointed,” he said.  

Bloom said that although the US dollar was “the best of a bad bunch”, the market had made wrong assumptions on the impact the Federal Reserves’ cutting of interest rates would have on the rest of the world.

“It is the reserve currency of the world, it is the centre piece of all the financial markets that have been paid to own dollars. It is beautiful,” said Bloom.

“The market was completely right that the US would slow. The market was completely right that the Fed would cut rates. The market was completely wrong that it wouldn’t matter elsewhere. The US gets a cold and we all get pneumonia.

“It’s always been like that and it continues to be like that. This year with these economies all having to cut on lower interest rates as the economy slowed. That is why the dollar has remained robust.”

If the US were to sign a deal with China and so bring the trade war to an end, the renminbi will become a more stable currency, according to Bloom.

“I think volatility in the renminbi will actually go down. Volatility in FX markets is already very low, but I think it would go down further,” said Bloom.

But Bloom warned that attitudes at central banks have been changing.

“This kind of behaviour where central banks were intervening, buying treasuries causing yields to go down, causes equities to go, that is fine. That is not fine anymore,” he said.

“Things are changing. The reaction from central banks is changing, how people have to behave is changing. It’s not a multilateral world, it’s a bilateral world. It is not an interest rate differential world because interest rates are negative in some countries.”

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