Francesc Riverola,
* The Federal Reserve surprised the exchange market this past March 18 by announcing the aggressive injection of new liquidity in the economy, including the purchase of $300 billion of U.S. Treasuries. The news prompted the euro to react violently against the greenback.
* However, we are of the opinion that the greenback will resume its positive momentum against the euro. The European currency’s recent appreciation reflects the fact that the ECB still lags behind the other central banks. Indeed, the European economy is certainly not faring better than others. Quantitative monetary easing is imminent in Europe and will drive down long-term rates and narrow yield spreads with the United States.
* Judging from the leading economic indicators of the G7 and China, the recent rise in commodity prices is most probably not supported by fundamental factors but rather by wishful thinking concerning recovery.
* Hence, at the global level, it still seems too soon for the cyclical currencies, including the Canadian dollar, to begin a sustained rally against the greenback. Indeed, this should not occur before the second half of the year.
SECOND MONETARY BLAST HITS EURO/USD EXCHANGE RATE by National Bank Financial