Eurozone heading into recession, sell EUR/USD - BCA

The euro is having a relatively good July when measured against the U.S. dollar, but BCA Research sees tough times ahead for the eurozone, and advises investors to sell the single currency.

At 08:50 ET (12:50 GMT), EUR/USD traded at 1.0818, down 0.4% on the day, but up around 1% over the last month.

Despite these gains for the EUR/USD pair, BCA Research suggests investors should adopt a defensive posture regarding European assets as it sees the likelihood of a recession ahead.

The European Central Bank cut its benchmark interest rates in early June, ahead of the U.S. Federal Reserve and the Bank of England, and is expected to further relax monetary policy twice more this year.

However, the two additional cuts this year priced in will be too little too late, said analysts at the Canadian investment research company, in a note dated July 29.

“The Eurozone is careening toward a recession. It sports too many vulnerabilities. Hence a shock from the U.S. or China will easily induce a contraction in output and an increase in unemployment,” BCA Research said.

The ECB rate cuts priced in by investors this year are insufficient to stave off a recession, BCA said, as in the past capital expenditure and gross domestic product continued to fall well after central banks started cutting rates.

“Europe already shows domestic vulnerabilities. The private sector is spending an expanding percentage of its income on debt servicing, while construction activity is plunging, bankruptcies are increasing, and the labor market is stalling,” BCA said.

Any foreign shock can tip this fragile economy into a recession, and foreign risks are plentiful - the U.S. is approaching a recession, China’s economy is slowing, and emerging markets are weak.

Investors should “adopt a defensive posture; favor bonds over stocks and defensive names over cyclical ones. Sell EUR/USD,” BCA said, seeing the currency pair falling to parity.

 

Source: Investing.com