The Near-Term Outlook For The Euro

Having rallied into Q3 2012 following the European Central Bank (ECB)’s pledge to purchase peripheral eurozone sovereign debt (only under certain conditions, of course), the euro has been trading around key resistance at US$1.30/EUR.

Although the euro has slipped somewhat following some relatively dovish comments by ECB President Mario Draghi after the bank’s monetary policy meeting on December 6, the near-term rally may not be over just yet. A breach of resistance at US$1.30/EUR would ordinarily suggest potential for a more pronounced rally towards US$1.40-1.45/EUR. However, given the negative fundamentals, we believe that such a break could see the euro drift towards US$1.35/EUR before paving the way for a fresh round of depreciation.

There are still many factors that could weigh on the euro in the coming quarters, from the inevitable Spanish request for assistance, to the Italian elections (to be held no later than April 2013), to the increasing likelihood that the ECB will have to maintain extremely easy policy for many years in order to hold the euro area together.

In terms of our core forecasts we maintain that, regardless of the potential for a near-term rally, the euro will continue trending lower over the medium term. However, given the current level of the euro, we have slightly raised our average forecast for 2013 to US$1.2500/EUR from US$1.2200/EUR, while maintaining our US$1.2000/EUR projection for 2014.

This Week’s Trivia Question

In last week’s question, the theme was Mexican presidents, but with an esoteric dimension. We asked “what rare object connects former Mexican president Porfirio Diaz with a long-anticipated major global event that may or may not take place three weeks from today [i.e. December 21, 2012]?” The answer is the crystal skull, several of which were said to have been owned by Diaz. The ‘global event’ referred to predictions that the world will experience either a cataclysm or major transformation on December 21, 2012, based on speculative interpretations of the Mayan calendar.

For this week’s question, we stick with the theme of objects with unusual properties, but of a far more down to earth nature. Despite US sanctions on Iran, what unusual item does the US Department of Defense buy from Iran through middlemen, for the purpose of assisting its war efforts in Afghanistan?