Eurorecord: will the European currency break through its historical maximum

In August, the euro / ruble exchange rate is highly likely to overcome the historic maximum, which was recorded in January 2016. Then the EU currency at the moment was worth more than 91 rubles. At this level and even higher – up to 95 per euro – the exchange rate can be delayed for 2-3 months. This is how the analysts surveyed by Izvestia assessed the prospects for currency quotes. In recent days, the rate of the European currency has been growing at an outstripping pace and has already broken the records in April – so far the most negative month for the ruble in recent years. The dollar is also strengthening against the Russian currency, though less dynamically. Wherein relative to the monetary units of other countries, the American falls.

Blocked America

At the opening of trading on the Moscow Exchange on July 31, the euro rate increased by 0.8% – to 87.35 rubles, the dollar rate – by 0.35% – to 73.43 rubles, follows from the data at 10:00 Moscow time. Throughout the day, the currencies of the EU and the US continued to strengthen. By 15:40, stock quotes rose to 84.75 and 74.09, respectively. Thus, the European currency rate has updated its maximum since April 1. The dollar last climbed above 74 rubles on May 6.

The European currency has been growing against the ruble at a faster pace in the last week. Compared to the results of trading last Friday, July 24, the euro has risen in price by 5%, the dollar – by 3.3%. The outpacing growth of the EU currency is associated with the pressure on the dollar from the ongoing monetary easing policy in the US, Anton Pokatovich, chief analyst at BCS Premier, told Izvestia. The US bond market is overheated – the Fed’s balance sheet has grown several times in recent months, and the yield is close to the minimum, he recalled. Investors are looking for alternative opportunities for capital allocation: against the background of the dollar, the euro now looks more attractive, the expert noted.

Over the past week, the dollar has weakened against most major world currencies. To the euro – from 0.86 on July 24 to 0.84 on the 31st. Against the pound – from 0.78 to 0.76, the yen – from 106 to 104.7.

Besides, investor optimism about the prospects for the recovery of the American economy has actually disappeared, added the chief economist of Gazprombank Sergey Konygin. The worsening epidemic picture, the prospects of business closure – all this negatively affects GDP forecasts. On July 30, the US Bureau of Economic Analysis reported a drop in the indicator by almost 33% in terms of annual rates. In fact, the recession has canceled out all growth since 2015. The previous anti-record was recorded in the first quarter of 1958, when the economy contracted by 10%.

In the short term, the trend for the weakening of the ruble against the euro and the dollar will continue, added the expert. Strengthening geopolitical risks scares off non-residents from purchasing ruble assets. They are probably buying currency again, as they did in March-April, in order to insure themselves against positions in OFZs.

Already in August, the euro rate may break through a historic maximum – on January 22, 2016, the currency was worth 91.2 rubles, said Maxim Petronevich, senior economist at the analytical department of Otkritie Bank. It can rise up to 95 per European currency, he believes, and remain at this level at least until November…

The second half of 2020, and August in particular, is a traditionally negative season for the ruble, recalled Maxim Petronevich. Companies sell foreign currency earnings, moreover, this is the peak season for the payment of dividends, he explained. In the second half of the year, as a rule, imports become more active. Now this seasonality of purchases abroad is aggravated by a surge in demand due to the opening of the economy after the quarantine.

The euro can indeed break through the maximum in the coming weeks, Anton Pokatovich agreed. A somewhat irrational optimism reigns in the markets so far, connected with the progress in the preparation of the EU budget for the next years, as well as with the position of the FRS to continue quantitative easing. The latter factor influences not so much the American stock market as the European one: investors understand that any failure of the economy will be flooded with money, so so far there is little threat to world stability. At the same time, “helicopter money” needs to be placed somewhere – and it flows into euros.

Evaporate at the click

However, the European currency is unlikely to stay above 90 for a long time. For Europe, the high cost of currency is extremely unprofitable, noted Maxim Petronevich. A significant part of the EU’s business is exporters. An expensive euro for them, especially in the current period after the hardest failure, is fatal. It is unlikely that the authorities are ready to maintain the exchange rate at a high level, therefore, it is likely that certain steps will be taken to weaken the currency.

In addition, optimism in the markets, for which there are virtually no fundamental factors, can “evaporate at a click,” added Anton Pokatovich. If investors do not yet see threats to the global economy, then as soon as the situation with the coronavirus begins to worsen or a new tough round of trade wars ensues, capital will run into dollars. The movement of money in the market is often irrational, so even if the United States goes to freeze Chinese assets on its territory – an unprecedented step in the sanctions wars – investors will invest in the American currency as the most stable in crisis situations, the expert concluded.

The weakening of the ruble against the euro and the dollar will continue in any case, added Sergey Konygin. Mainly due to the strengthening of Washington’s sanctions rhetoric against Moscow. Fears of new restrictions can be seen in the examples of the last OFZ auctions of the Ministry of Finance, for which the demand of non-residents is falling.

Changes in economic conditions will affect the consumption patterns of Russians, the expert believes. In particular, deposit rates are now at their lows. To continue saving money, especially in the current exchange rate, for many citizens makes no sense – it will seem more expedient for them to make large purchases: real estate, a car, investments in securities, the expert summed up.

Against the backdrop of growing uncertainty, the demand for risk-free assets, in particular, for gold, is traditionally increasing, noted Vasilisa Baranova, senior analyst at ACRA’s sovereign ratings and macroeconomic analysis group. In this case, we are seeing an acceleration in the growth of the value of gold due to concerns about a second wave of COVID-19, especially in the United States. Prices are now breaking an eight-year record and hitting all-time highs. However, for the population of Russia, gold and precious stones are not and are unlikely to become key assets for savings in the foreseeable future, so it is more likely that real estate will be in great demand among citizens, Vasilisa Baranova agreed.