Significance of IMF Comments

The euro was trading heavily even before the IMF's comments hit the wires suggesting that in the February 25-March 25 period, the single currency was over-valued by 0-15%. Although this is wide enough to be nearly meaningless substantively, the significance may lay in the shift. In recent years IMF officials were often seen on the side of those that thought the dollar was over-valued and that to redress the global imbalance, the dollar would have to decline.

The IMF also said that ECB monetary policy should remain accommodative. Given that large amount of 1 year funding that the ECB made available earlier this month seems to also argue against a near-term shift in monetary policy in any event.

The IMF forecast the euro would average $1.38 this year after $1.47 last year. Ironically through today, the euro has averaged roughly $1.3450 this year. So on the face of it, the IMF report today does not seem as unequivocally as euro bearish as the headline might appear.

That said, we do share the view that the euro is going to generally trend lower. The driver, we suspect, will be U.S. rates rising relative to Europe, re-weighting of equity investment and foreign direct investment flows. We expect the macro situation to allow the U.S. to emerge to sustained growth before Europe. Key euro support seen near $1.40. There is talk that options struck near there may be being defended and there is talk of reserve manager demand.