How will the trend of EUR/USD in 2021?

Since 2015, the international role of the euro has changed and it has become an important source of global liquidity supply growth, which has a greater impact on international capital flows and financial stability. Under the fundamentals of the European economy, unconventional monetary policies, and the wave of "de-dollarization", coupled with the weakening of the U.S. dollar under the epidemic in 2020, the European Union has reached a 750 billion euro recovery fund agreement. Various factors have pushed the euro from assets to liabilities. End, risk aversion and reserve functions are enhanced.

The role of EUR

Since the European debt crisis in 2009, the international status of the euro has been significantly impacted, and its share in global payment transactions, international investment and financing, and foreign exchange reserves has shrunk significantly. But since 2015, the international role of the euro has begun to change.

The euro turned to the debt side and became the main financing currency. From the perspective of the international bond market.The scale and proportion of yuan-denominated financing reversed and rebounded, showing an overall upward trend. In the first three quarters of 2019.

The scale of issuance of yuan-denominated international bonds was US$1.64 trillion, an increase of 0.6% year-on-year and an increase of 10.4% year-on-year.In contrast, the U.S. dollar and other currencies’ international bond issuance amounted to US$2.22 trillion and US$0.90 trillion respectively.It contracted 6.3% and 2.9% year-on-year. On the whole, the utilization rate of dollar-denominated prices has declined, and the amount of euro-denominated issuance has increased relatively.

As of the end of the third quarter of 2019, the euro accounted for 33.5% of the total international bond issuance, which was the lowest level three years ago(25.5%) rebounded by 8 percentage points; the US dollar accounted for 49.2%, a contraction of 8.3% from the same period in the three-year period.

Reasons for the changing role of the euro

The European Central Bank's monetary policy has promoted the euro interest rate and exchange rate to a certain extent

The low interest rate and exchange rate of the euro have reduced the income of the euro as an investment currency on the one hand, and also reduced the cost of the euro as a financing currency on the other hand. In the international financial market chasing interest rates, the euro is more and more favored by international borrowers, and more and more issuers have begun to borrow euro bonds or replace high-yield bonds with euro bonds in order to reduce financing costs. In addition, the financing cost of borrowing currencies such as the US dollar through the euro has been greatly reduced, or even negative. To a certain extent, this has contributed to the increase in the scale of euro financing.

De-dollarization

With the normalization of the Fed’s monetary policy and the strengthening of the US dollar exchange rate, especially in an environment of weak global growth, emerging economies are facing huge US dollar debt pressure. Not only do they have the need for diversified financing, but they are also unable to continue to borrow US dollar debt. The euro has become the primary Alternative currency.

Under the continuous loose monetary policy of the Eurozone, the interest of emerging economies in the liquidity of the euro has increased substantially, and the liquidity of the euro in emerging markets has maintained high growth for four consecutive years. Taking the Asia-Pacific region as an example, the dollar liquidity growth rate in the first three quarters of 2019 was -1.1%, -1.1%, and 0.3%; in comparison, the euro liquidity growth rate was 23.2%, 25.0%, and 9.9%. . This shows that emerging market economies seek diversified financing to reduce dollar risk exposure.

On the other hand, geopolitical risks have caused some countries to reduce dollar trading and holdings and begin to switch to the euro.

After President Lampe came to power, the United States has attacked all sides in the political and diplomatic fields, deepening its suspicion with traditional allies. Take Russia as an example. Since the implementation of a new round of sanctions by the United States in early 2018, Russia has sold approximately US$100 billion worth of US dollar reserve assets and purchased nearly US$90 billion worth of Euro assets. As of the third quarter of 2019, the shares of Russian dollar-denominated assets and liabilities were 57.4% and 55.3%, respectively, a decrease of 14 percentage points and 16 percentage points from their 2015 highs, while the share of euro-denominated assets and liabilities rose by more than 8%. Percent and 1 percent.

U.S. dollar is difficult to be replaced

It is difficult for the euro to recover to the pre-crisis level in the short term, and the trend towards international financing and reserve currencies will continue during this period of time. Although the euro’s international liquidity has maintained rapid growth since 2015, it is still more crisis.

There is a certain gap between the former status and the dollar share. Except for Europe and Canada, the euro’s balance of international bonds less than 16% of China’s domestic use; the U.S. dollar occupies an absolute dominant position in the international bond market, especially the Middle East and offshore financial centers.

Leading position, its share is close to 90%, which is in line with the U.S. dollar as a commodity denominated currency and the core currency of financial transactions.Commensurate. Based on Europe’s weak economic situation and divided political game, it is difficult for the euro to return to crisis in the short term.The former has the same position as the U.S. dollar, which will remain an important choice for international financing and hedging under the loose monetary policy item.

2021 ：Be alert to the risk of Euro liquidity reversal

Be alert to the risk of Euro liquidity reversal. At present, the euro has become an important source of global liquidity supply growth.It has a greater impact on international capital flows and financial stability. However, international organizations such as the IMF and marketThe focus of attention has always been on dollar financing analysis, and the focus on the euro is much lower than the dollar. Recently, global public health incidents have intensified market concerns, the new crown epidemic in Europe has become increasingly severe, the European Central Bank is expected to further cut interest rates, and the international financial and arbitrage traders have borrowed in euros, and European investors have to use the euro issued by emerging market borrowers.

(Editor's note: This article is adapted from the Bank of China Research Institute "Renminbi Internationalization Observation", Issue 5, 2020: The change, reasons and prospects of the international role of the euro, the title is prepared by the editor)