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Apr 4, 2016
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`Brexit' debate is No. 1 euro threat for top currency forecaster.

Not only will the “Brexit” debate weigh on the pound, it will also wipe out the euro’s biggest quarterly advance in five years, according to Bayerische Landesbank. The German lender topped Bloomberg’s major-currency rankings for a second consecutive quarter by successfully predicting the euro’s fortunes versus peers including the yen, Swiss franc and Swedish krona.

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“It’s not a risk just for Britain and the pound but also for the euro,” said Wolfgang Kiener, who compiles BayernLB’s forecasts with colleague Manuel Andersch from their office in Munich. “It’s hard to call and thus is the biggest risk. Most people hope the British will stay in the EU but no one can be sure because we have refugees, terrorist attacks -- lots of events which could make the British leave.”

With the June 23 referendum drawing closer and events such as the Brussels bombings last month potentially influencing the outcome, strategists are assessing the impact of the debate on the economic bloc as a whole. A U.K. exit from the EU may call into question the European project and inspire referendums from other nations.

BayernLB is more convinced about euro losses than second-placed Julius Baer Group Ltd. and third-ranked National Bank of Canada. But where the German lender really stands out is by citing “Brexit” concern as the number-one reason why the single currency will fall -- outweighing the impact of the Federal Reserve raising interest rates later in the year and the European Central Bank’s commitment to currency-sapping stimulus.

Fear Prevails

The euro will slide to $1.09 by June 30 and $1.04 by year-end, BayernLB predicts, compared with $1.1382 at 6:22 a.m. in London on Tuesday. That’s based on its assumption Britain will remain in the EU and declines will be driven by the uncertainty of the situation.

The euro has shrugged off the threat posed by the referendum, supported by the Fed signaling a slower pace of interest-rate increases. It climbed 4.8 percent versus the dollar from January through March in its best quarter since March 2011, while the pound fell 2.6 percent in its third straight quarterly decline.

If “Brexit” does happen, it would “bring into focus the philosophical question of whether the EU is a successful union or a failure” and cause the euro to fall to parity with the dollar by year-end, said Sireen Harajli, a strategist at Mizuho Bank Ltd. in New York.

BayernLB’s ‘Surprises’

Mizuho was second in Bloomberg’s euro-dollar rankings and has been placed in the top three for the past three quarters. BayernLB wasn’t in the top 10 of that group this time around and Kiener admits to “quite a few surprises” in forecasting the euro.

Mizuho is more bearish on the euro than its German rival in the near term, predicting a drop to $1.07 in the second quarter and $1.05 by year-end.

The outcome of the June referendum on Britain’s EU membership remains too close to call. An Ipsos Mori poll last week showed 49 percent of respondents were in favor of staying in the EU and 41 percent supported an exit, while an ORB/Independent News & Media Plc survey had 51 percent wanting to remain and 49 percent to leave.Assuming Britain remains part of the world’s largest single market, the runners up to BayernLB in the overall rankings are confident the euro will remain buoyant for the rest of 2016.

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Fed Concern

While the prospect of a fractured EU leaves the euro vulnerable to “contagion fear,” the ECB’s reluctance to cut its deposit rate further below zero will limit the euro’s declines, according to Stefane Marion, Montreal-based chief economist at National Bank of Canada.

Julius Baer agrees that the euro will be supported by “less divergence in monetary policy,” said David Kohl, the bank’s Frankfurt-based head of foreign-exchange research. His company sees the euro remaining little changed by year-end at $1.13, with NBC predicting $1.12. Both are more optimistic than the $1.09 median forecast in Bloomberg’s survey.

BayernLB, though, forecasts the euro will keep falling in the second half of the year, weakened by U.S. policy.

It sees the fallout from the EU debate spreading further than just Europe -- right across the Atlantic, preventing the Fed from raising interest rates in the first half for fear of global market turmoil if Britain voted to quit. But once the referendum is out of the way, Kiener said, U.S. officials will raise borrowing costs in September, further boosting the dollar at the expense of the euro.

“Fundamentally the euro will weaken because the dollar will get stronger,” Kiener said. “Some time ago we were more dovish than markets were” on U.S. rates. “Now it’s rather the contrary.”

Source: Bloomberg