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Euro: Watch Out Below, Says Deutsche Bank

The decline and fall of the euro’s exchange rate against the dollar is moving at an eyebrow-raising rate.

It’s at $ 1.0750… no, $ 1.0725… no, just under $ 1.07. You get the idea.

Predicting a decline to one-to-one for the exchange rate is becoming an increasingly popular sport.

Deutsche Bank, whose thoughts are worth a mention since it’s the second biggest bank in FX trading, has been in the bearish camp for a while. Now it’s even deeper in bear territory, predicting the rate will drop to $ 0.85 two years from now.

The bank revised lower its forecasts on the euro against the dollar Tuesday, taking the view that European investors will shift their assets towards foreign markets, and in particular the U.S., the U.K. and Canada.

Strategists George Saravelos and Robin Winkler expect the euro to fall towards parity by the end of 2015 from a previous forecast of  1.05. From there, the euro will keep plummeting to 0.90 by 2016 and 0.85 in 2017.

That’s one of the most bearish calls so far on the euro.

Pushed down by the combined effect of the ECB bond-buying program and the prospect of an interest rate rise in the U.S., the euro has lost about 12% since the start of the year agains the dollar. That’s a big move for a major currency. It’s worth pointing out that it’s lost less against a trade-weighted basket of other currencies, which you can read all about here.

For Deutsche Bank, capital flows are key. Local investors will grow tired of the tiny returns available in the region’s pricey bond market, and look elsewhere, the bank reckons.

Capital outflows will be of about €4 trillion ($ 4.3 billion).  Assuming net financial outflows of €150 billion a quarter, this process will take the rest of the decade, it says. “The primary destination of European outflows will be core fixed income markets in the rest of the world, and evidence over the last few months supports these trends,” they say.

Foreign buyers of European bonds are not expected to make up the gap.

“We are seeing large outflows from European fixed income,” said Adrian Owens, a currency funds manager at GAM last week. “Why buy Bunds at 35 basis points? Why buy euro debt from Coca-Cola at these yields? Central bank reserve managers are also moving out of the euro.”

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