What’s happening: The euro has fallen to around $1.03, plunging more than 8% against the US dollar year-to-date. It is now trading at its lowest level since late 2002.
Most analysts don’t think it’s bottomed out yet. Predictions are circulating that it could even reach parity, in which a dollar can be exchanged for a euro.
“I’m bearish on the Euro until I see a headline that tells me global growth is going to accelerate dramatically,” Nomura strategist Jordan Rochester told me. He thinks the euro will reach parity by the end of August.
Decomposition: what is good for American tourists is difficult for European companies which must buy energy, raw materials and components in dollars. The rising cost of imports could continue to drive up prices in the 19 countries that use the euro, where annual inflation hit a record high of 8.6% in June.
What triggers the massive sell-off of the euro, the second most widely used currency in the world? Analysts point to a few factors.
Natural gas prices in Europe are at their highest level since March. Russia has cut off gas flows to Europe and the main Nord Stream gas pipeline is about to be serviced. Energy workers in Norway have just gone on strike, threatening further supply constraints.
“We have an upcoming winter slump for the Eurozone and I expect energy prices to remain very high,” Rochester said.
The euro tends to perform poorly when investors’ risk appetite declines.
Another issue is trade. Germany has just reported a rare monthly trade deficit, a sign that high energy prices are weighing on manufacturers in the European exporting powerhouse. A weaker euro then becomes necessary to make the bloc’s exports more competitive.
Europe was also behind the United States in raising interest rates, although the European Central Bank expects to start the hike this month. This means that investors are more likely to park their money in the United States, where they can get better returns.
Customers “are very concerned about anything related to Europe,” Societe Generale strategist Kit Juckes said on Tuesday. “Germany’s trade data turned sour yesterday, and the feeling that the current account surplus is being beaten by energy prices is widespread. Add to that concerns about fragmentation and fears that the The global economy is turning south, and it’s hard to be even slightly optimistic about the euro.”
It’s Bezos vs. the White House vs. Inflation
Inflation, high for decades, is catching the attention of the White House as it tries to assure Americans that it takes price increases seriously. This has escalated by pointing the finger at Corporate America, which the Biden administration says is making the problem worse.
“My message to companies that run gas stations and set prices at the pump is simple: We are in a time of war and global peril,” President Joe Biden tweeted over the holiday weekend. “Reduce the price you charge at the pump to reflect the cost you pay for the product. And do it now.”
It sparked an outcry from Amazon founder Jeff Bezos, who was increasingly outspoken on Twitter.
“Ouch. Inflation is far too big an issue for the White House to keep making statements like this,” he tweeted in response. “This is either a direct misdirection or a deep misunderstanding of basic market dynamics.”
Veteran venture capitalist Bill Gurley has also jumped into the fray. He said he “totally” agreed with Bezos, pointing to “the last three hundred years of economic research and understanding.”
The White House pushed back on the criticism.
“Oil prices have fallen about $15 over the past month, but pump prices have barely come down. That’s not ‘basic market dynamics’. It’s a market that leaves fall the American consumer,” said press secretary Karine Jean-Pierre on Twitter. “But I guess it’s no surprise that you think oil and gas companies using their market power to reap record profits at the expense of the American people is the way our economy is supposed to work.”
Checking the numbers: US oil prices have retreated over the past month as recession fears came to the fore. West Texas Intermediate futures, the benchmark, last traded at around $108.50 a barrel, down from above $118.50 a month ago. This $10 difference is less than the White House figure.
Still, it’s true that there was no overwhelming relief at the pump. The average price of a gallon of regular gasoline is $4.80. A month ago it was $4.85, down from $3.13 a year ago.
Is this the result of a price increase? Maybe in some cases. But the main drivers of fuel prices right now are high demand and tight supply, especially of gasoline and diesel. This is the result of the disruptions caused by the pandemic, the war in Ukraine and the arrival of the summer driving season in the northern hemisphere. Lack of investment in refining capacity also exacerbates the problem.
$380 worth of oil? JPMorgan sees a scenario where it is possible
Shortly after Russia invaded Ukraine, world oil prices jumped above $139 a barrel. They were last trading below $113. But JPMorgan Chase strategists see a possible scenario in which “stratospheric” crude at $380 could be on the cards, making recent gains seem puny by comparison.
Take a step back: Last week, G7 leaders agreed to develop a plan to cap the price of Russian oil. This would allow the country’s discounted barrels to continue to come to market, but would reduce Moscow’s revenue.
Details are still being worked out. But in theory, to benefit from insurance from Western companies for their cargoes, customers like China and India would agree to pay only 50 to 60 dollars a barrel.
That would limit revenue for the Kremlin, which has estimated the price of its export barrels to hit $80 by the end of 2022.
But the JPMorgan team, including strategist Natasha Kaneva, warns that Russia could retaliate by intentionally limiting oil production as it does with natural gas. This would cause prices to skyrocket. If it cut production by 3 million barrels a day, the bank predicts prices could rise to $190 a barrel. In a “worst-case scenario” of a reduction of 5 million barrels per day, prices could reach $380.
“If the geopolitical situation demands it, it now seems more likely that export cuts can be used as a policy lever/tool, in our view,” Kaneva and colleagues wrote this month.
US factory orders for May post at 10 a.m. ET.
Coming tomorrow: Investors will comb through the minutes of the Federal Reserve’s June meeting.