Euro will fall to 1.18 by early next year, says TD Securities

TD Securities has topped this week's 12-month currency forecast rankings after accurately predicting in late 2011 that the health of eurozone economies would deteriorate during 2012, to the detriment of the euro.

On October 21, 2011 the Canadian bank predicted EUR/USD would fall from 1.38 to 1.33 in 12 months' time. The euro ultimately fell even further, trading at 1.30 on October 22, 2012. Looking back to his forecasts a year ago, Shaun Osborne, chief foreign exchange strategist at TD Securities in Toronto, recalls a mood of pessimism relating to the eurozone during the fourth quarter.

"Last October, Greece was still moving into the restructuring process and it was our view that we would probably see a deterioration in the eurozone economy along with easier interest rate policy from the European Central Bank. We thought that we would see a fairly sharp deterioration in short-term interest rate spreads against the euro from that point onwards. This time last year, we were split 20 to 25 basis points over for the euro relative to the dollar but now, we are at a 20-odd basis points discount for the euro to the dollar," says Osborne.

Looking ahead to 2013, TD Securities expects EUR/USD to fall to 1.18 before rebounding up towards 1.25 by the end of next year. Osborne believes the fundamental European recession will continue to drag on, affecting more of the core European economies rather than just the periphery, although he says the euro appears to have found more support than recent forecasts would have suggested.

Elsewhere, TD Securities expected stability for USD/JPY in the high 70s, despite the Japanese yen having been through a period of repeated intervention to stem its appreciation last year. With USD/JPY at 76.68 last October, the bank forecast the pair to rise to 78 in 12 months' time, close to the October 22 spot rate of 79.67. Looking forward, Osborne expects the yen will continue to depreciate against the dollar.

Last October, Greece was still moving into the restructuring process and it was our view that we would probably see a deterioration in the eurozone economy

"In the next 12 months we are looking for more yen weakness but I think Japan is looking fundamentally challenged," he says. "We have seen a string of trade deficits over the past couple of months, the economy is still quite slow and the bias is towards more easing action and more intervention. Our forecast is for a gradual increase in short-term interest rates over the course of the next few quarters, which should be modestly supportive of USD/JPY. We're looking for 84 by the end of next year."