A week before the next meeting of the European Central Bank, the euro is visiting new two-and-a-half-year highs, at almost 1.22 dollars. Since it is the greenback that is falling and not the euro that is strengthening, strategists do not believe in aggressive intervention by the ECB to change the trend.

The euro, which this week crossed the important threshold of 1.2 dollars, continues its ascent this Thursday with a peak at 1.2168, the highest in two and a half years, and this a week before the meeting of the European Central Bank from which are nevertheless expected new measures to support the economy through quantitative rate cuts (the increase in the amount of the pandemic asset purchase program or PEPP and the extension of the TLTRO program are high on economists' expectations). Currency traders know full well that the ECB is keeping the euro high on its radar, knowing that an overly strong currency would undermine its efforts to return to inflation of 2%. Until recently, the Frankfurt institution cited the level of the euro as a determinant of its monetary policy, alongside the health crisis and developments around vaccines. So what? Quantitative easing – or at least its threat – would no longer be a factor in depreciation?

"Verbal intervention will not be enough to slow down the rally," said Milan Cutkovic, a market analyst at currency broker Axi, who does not expect the ECB to hit hard at its monetary policy meeting. Given that the current appreciation of the euro is mainly the counterpart of a sell-off on the dollar, the ECB will be "reluctant" to be too aggressive "given the risk of loss of credibility", says Derek Halpenny, head of research at MUFG Bank. The NEER euro, calculated not from the dollar but from a basket of trade-weighted but non-inflation-adjusted currencies , "was actually stable in November compared to October. The euro RRSP (the same basket, but this time adjusted) is certainly up almost 8% since the beginning of the year, "but it is only 3.5% above its five-year moving average and is well below its previous highs", confronts the strategist: the euro is 4.5% weaker than its 2014 levels, before the ECB implemented its negative interest rate policy, "and 12.5% and 13% below its levels at the beginning of the eurozone debt crisis and the global financial crisis, crises of 2010 and 2008, respectively. On this basis, it would be difficult to say that the level of the euro is in any way a threat to competitiveness. »

1.23 at the end of next year

Strategists see the euro rise even higher next year, to $1.23 in the third and fourth quarters, according to the Bloomberg consensus, before an average of $1.25 in 2023. Short positions on the dollar are at record highs among asset managers. Kit Juckes, Director of Currency Strategy at General, is wary of positioning biases among traders and asset managers, but points out that "the consensus is not always wrong about the direction that asset prices are taking. Perhaps the consensus of 1.22 on average for next year is "too low", with markets often being "too timid" when it comes to anticipating the return to the average. On the other hand, traders and managers are often fooled by the illusion of series, which makes them believe that the trend of yesterday (on which they are positioned) will still be that of tomorrow. But, this time, Kit Juckes doesn't see how the trend could be reversed. "Jay Powell is much less inclined to raise rates than he was in 2018. The great danger facing dollar sellers is that the Fed will radically change its attitude as the economic recovery takes hold. But it's such an unlikely event (at least in 2021) that I don't know. »

Unlike Europe where the health situation is improving, the United States is experiencing a worsening of the crisis. The number of new coronavirus cases is exploding, hospitalizations are reaching record highs (100,000 yesterday) and Robert Redfield, of the US Centers for Disease Control and Prevention (CDC), warned that deaths could total 450,000 by February (275,000 today). The months of December, January and February are going to be "difficult," he warned. In California, where restrictive measures had already been put in place, the sprawling city of Los Angeles has just resolved to reconfinement. A blow to the economy (if California were a country, it would be the fourth world power, ahead of Britain and France), but that the authorities consider necessary.

Because of the second wave of coronavirus, the United States is suffering a new brake on its activity: high-frequency indicators show it, the Fed says so. In its latest "Beige Book", published last night and which summarizes the current economic conditions in the various districts of the Federal Reserve, the  US central bank notes that the economic recovery initially accelerated this fall at a pace "modest to moderate" before then slowing down in November, especially in the regions most affected by the epidemic such as the Northeast and the Midwest.

Before this observation, Jerome Powell, the chairman of the Fed, had already indicated that US interest rates would remain very low until at least 2023. Given the worsening of the crisis in the country and the absence of a new budgetary response at this time, the stock market is betting that the AME central bank, whose members will meet on December 15 and 16, will strengthen its intervention to support the economy. Jerome Powell, who was heard Tuesday by the Senate Banking Committee, as every six months, said nothing on this occasion about an increase in asset purchases, refraining from saying that the Fed, in the future, would not rush to reduce them.

Focus on "reflation"

At the same time, US parliamentarians have resumed negotiations on the new stimulus package. "Investors are looking at the US economy and see the deficit trajectory as unsustainable," said Sébastien Galy, macro strategist at Nordea AM. They demand higher long-term interest rates and, for foreigners, a weaker currency to buy U.S. debt. 10-year yields are rising towards 1%, while 30-year rates pushed yesterday to more than $1.72. Given the US efforts to revive the economy, investors expect, in the long term, a surge in inflation, which will force the Fed to raise its key rates, explains Sébastien Galy. "This feeds the carry trade in yuan and feeds the recycling of reserves in euros. »

The euro is not the only currency to move on highs of more than two years. This is also the case for the Canadian and Australian dollars or the Korean won. The Swiss franc has returned to its 2015 levels. Vaccines are a game changer, strategists repeat. The world economy will be able to restart and so-called "safe haven" assets, such as the dollar, are sold in favor of currencies or stocks massacred at the height of the crisis. "The greenback, the benchmark currency during the darkest moments of 2020, is no longer in high demand," said Ricardo Evangelista, an analyst at brokerage firm ActivTrades. The theme of "reflation" holds the top of the pavement in the stock market. This translates for example on the Cac 40 by a continuation of the rebound of Airbus (+50% since the end of October), which nevertheless manufactures in euros and sells in dollars. The aircraft manufacturer, usually very sensitive to the evolution of parity, continues to be driven by hopes of vaccines. The engine manufacturer Safran, which generates more than a third of its turnover in the United States (and therefore suffers a negative conversion effect), is also still up on Thursday on the Paris Stock Exchange.