Forex Video : The Euro outlook and the link between FX and Equity.

Peter Rosenstreich, chief market analyst at ACM Advanced Currency Markets, talks with Bloomberg's Mark Barton about the impact of the April 22 U.K. budget statement on the pound, divisions among European Central Bank policy makers, the outlook for the euro and the links between equity and currency markets.

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Mark Barton
Right. Time for our currency report for today. Concerns about a split in the heart of the ECB
continue to have a negative effect on the Euro. The currency weakened to a one-month low
against the dollar despite efforts by ECB President Jean-Claude Trichet to appeal for unity. Peter
Rosenstreich, Chief Market Strategist at ACM, joins us live from Geneva. Peter, good morning.
Thanks for joining us.

Peter Rosenstreich
Good morning.
Mark Barton
Peter, how concerned are you about the split, the obvious split, within the ECB and its
implications for the Euro?

Peter Rosenstreich
Well, I think it’s pretty clear to say that the market does not like the uncertainty and doesn’t like
the divergence between the relatively vocal ECB members, and they’re punishing the Euro for it.
I think it sort of gives some level of insight that perhaps even the ECB doesn’t know. We’ve
heard Trichet say that he was contemplating some sort of unconventional measures, but without
more details, the market doesn’t really enjoy this time of ambiguity. The divergence between
members’ comments are not helping the Euro by any stretch of the imagination.

Mark Barton
As you say, your forecasts are for the Euro to weaken further. Over how much? Over what sort
of time?

Peter Rosenstreich
Well, we’re looking for the next month. The big event is obviously going to be the May 7th ECB
meeting where we’re actually going to see exactly what these unconventional measures are
going to – or what form they’re going to take. Before that, the market’s really not going to take a
risk on the Euro. We’re also seeing some divergence between the old equity correlations and the
Euro/Dollar correlations. If we continue to see optimism in the equity markets, it’s not going to
benefit the Euro as it has in the past. This is more of a sort of a one month forecast.

Mark Barton
Peter, you’ve been looking at the link between FX and equities. There are some interesting
findings here, aren’t there?

Peter Rosenstreich
Absolutely. This has been a core driver for the last three months. The equity markets have
basically become a proxy for the risk aversion trade as risk aversion is a very difficult thing to
measure, but we see it coming through equity markets very quickly. We’re seeing, actually, the
volatility being more tightly correlated to the Euro/Dollar and, say, the equity pricing per se. As
volatility declines, as equities pick up a trend higher, the correlation with the Euro/Dollar: we’re
seeing significant divergence. We continue to see that playing through the market and being a
significant driver in the Euro/Dollar.

Mark Barton
It’s a big week for the UK, Peter. Your forecasts are for Sterling to weaken against the Dollar in
coming months. What sort of impact is the budget going to have on the Pound?

Peter Rosenstreich
It’s going to have an enormous effect on the Pound. This is going to be a massive type of budget
that Darling is going to have to put in front. It’s going to negate a lot of the QE. The roughly
£75bn worth of buying that the BoE has conducted puts in the marketplace around $270bn worth
of new gilt issuance. It means that the MPC’s going to have to step up their QE programme to
off-set this massive budget, and it’s going to weigh very heavily on the Sterling.

Mark Barton
Peter, thanks a lot. Peter there from ACM.