Citigroup sees euro's rally as gift for bears betting on parity

[SYDNEY] Citigroup says investors may soon have the best opportunity they'll see in years to bet on a drop in the euro below US$1. They just need a little patience. The European Central Bank won't add to stimulus at a policy meeting that ends Thursday, awaiting tightening by Federal Reserve officials who have signaled that a liftoff is possible in December, estimates Tom Fitzpatrick, head of technical strategy at the world's largest currency trader. That will probably help the euro extend its rally toward US$1.20, a climb that it won't be able to sustain, he said. The shared currency was at US$1.1342 as of 8 am in London, up 3.8 per cent over the past three months in the strongest gain among major peers.

"If you see anything in the ballpark of US$1.20 in the euro in the fourth quarter of this year, it's the closest thing you're going to get to a gift in financial markets," Mr Fitzpatrick said on the sidelines of an investment conference in Sydney organized by Citigroup.

"The QE dynamics in Europe are going to be focused much more on its potential feedback loop to the currency," he said. "Which is why I think, therefore, if we have an elevated currency there's going to be an increasing chance that you will actually see them ease further." So far, ECB policy makers have been saying it's too soon to decide. Pressure is building on them with inflation turning negative in September and the euro 8.5 per cent stronger than a 12-year low reached in the first quarter. Only one of 43 economists surveyed by Bloomberg predicts the Governing Council will step up its QE program at Thursday's meeting with a majority saying it will take till the end of the year for officials to decide they have no choice but to add to stimulus.

The earliest the ECB will move is December and the Fed will probably tighten at some point in the first quarter, according to Fitzpatrick. "The danger, in fact, is that you end up anyway getting the double reactive function - that you get both the ECB easing and the Fed raising," he said. "Our longer-term target 12 to 24 months out is still that we can see the euro between 88 and 90 US cents." The median estimate of forecasts compiled by Bloomberg is for Europe's common currency to end the year at US$1.09. The lowest forecast through till 2017 is for the euro to sink to 95 US cents.

BLOOMBERG