— Europe’s “manufacturing and the tradables sector are clearly exhibiting stress, arising in part from the shock from China.
Jen said the common currency could slump to $1.05 later this year if stress emanating from China bleeds further into Europe’s economy and prevents the European Central Bank from normalizing policy, while the U.S. “continues to outperform.” Fiscal stimulus and slowing structural reforms in China probably won’t be sufficient to spark a “V-shaped recovery” in the first half of 2019 for the Asian nation, according to Jen.
Europe’s “manufacturing and the tradables sector are clearly exhibiting stress, arising in part from the shock from China,” the London-based hedge fund manager wrote in a note Friday. “If I am right that the Chinese economy will remain weak, Europe and the ECB will remain under pressure.”
Jen’s call for the euro is more pessimistic than the most bearish of analysts surveyed by Bloomberg. The median forecast is for the common currency to strengthen to $1.19 in the fourth quarter, while the low forecast sits at $1.10. The euro traded at $1.1325 as of Monday morning in New York, after falling roughly 8 percent against the greenback over the past year.
On the other side of the trade, the dollar could continue to enjoy its recent resilience, according to Jen. With the Federal Reserve pledging patience in regards to its policy tightening plans, Treasury yields should be expected to decline over time, creating a “sweet spot” for foreign bond buyers. Additionally, mounting questions over the global economy should keep the greenback bid, Jen wrote.
“In light of the dovish Fed and the rally in equities, the dollar has been remarkably robust,” Jen wrote. “The dollar is supported precisely because the world has grown more uncertain about the economic outlook.”