Euro Dollar Rate Forecasts for 2014-2015 - page 4
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GOLDMAN: After The ECB's QE Announcement, Here's What Happens Next In Europe
It's been a big week for Europe.
Last Thursday, the European Central Bank announced its long-anticipated quantitative easing program, which came in larger than expected.
And over the weekend, Greece elected left wing anti-austerity party Syriza to parliament, setting the table for potentially contentious talks between Greece and other members of the eurozone.
For investors, however, Europe's QE program is the main event.
Last week, Goldman Sachs' equity strategy team was in Europe last week speaking with clients about the impact this program is expected to have and in note over the weekend, the firm wrote that it is convinced these five things happen next:
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EUR/USD: No Defying Parity; New Targets – BNPP
Euro/dollar lost around 20% from the highs in early May. After the recent drop, has it found a bottom?
Not yet. The team at BNP Paribas revised the targets to the downside.
Here is their view :
The speed of EUR/USD’s decline since the start of the year is causing investors to question the size, direction and catalyst for the next EUR move, notes BNP Paribas.
Real yields should continue to move against the EUR:
“The ECB’s quantitative easing programme exceeded the markets’ high expectations…So far, however, the follow-through from higher inflation expectations has been lacklustre, with the 5y5y breakeven inflation rate falling to around 1.60 after rising above 1.80 in the aftermath of the ECB announcement,” BNPP adds.
“Nevertheless, we would highlight that the move higher of this measure is likely to be gradual as QE feeds through to the real economy, rather than a knee jerk reaction. As a result, our forecasts indicate gradual declining real yield support for EURUSD,” BNPP argues.
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Is EUR/USD Recovery A Game-Change?: Levels & Targets – JP Morgan
The stabilization of EUR/USD is raising the question: is this a temporary correction or a big change?
The team at JP Morgan examines the charts and sets targets in both directions:
Here is their view :
A projected C-wave target for the multi-year double-zigzag consolidation pattern in EUR/USD at 1.1091 finally managed to provide a base for the ongoing recovery, notes JP Morgan.
The big question in this context however is, how far this recovery can extend and where would we get indications for a game change?
“That said, we see pivotal resistance at 1.1460 as crucial, which if taken out, would open the way for a broader recovery to 1.1660/79 (minor 38.2 %/pivot). Only above the latter we’d see the EUR bears in trouble as the next 38.2 % Fib.-retracement on higher scale would only cut in at 1.2092,” JPM argues.
“Particularly below 1.1460 though, 1.1091 remains at risk. Once taken out, there would only 1.0765 and 1.0503 (pivots) left on the way towards 1.0072 (76.4 %), if not to 0.9298 (wave 3 projection),” JPM adds.
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Where To Sell EUR/USD, AUD/USD, & To Buy USD/CAD? – UBS
The dollar is set to continue rising according tot he team at UBS, against the euro, Aussie and loonie.
Yet they not only talk about the directions but also about entry points and targets for three key pairs:
Here is their view :
The following are UBS’ latest short-term (mostly intraday) trading strategies for EUR/USD, AUD/USD, and USD/CAD.
EUR/USD: has been choppy on uncertainty around Greece. The pair overnight traded up to 1.1353 on news that Greece will stay in EU bailout program but slipped back to 1.1310 when Greece denied those reports. With ECB QE, US rates and the search for an agreement with Greece weighing on EURUSD, we still prefer to sell on spikes to 1.1450-1.1500.
AUD/USD: slipped to 0.7670 from 0.7725 on the disappointing Australia employment data. Selling in AUD crosses kept the pair offered down to 0.7644. Sell rallies to 0.7740 and 0.7880. Support lies at 0.7620, the Feb. 3 low, ahead of 0.7450, the May 18 2009 low. Watch RBA Governor Stevens’ testimony tonight.
USD/CAD: was paid up to 1.2700 in New York yesterday with crude oil prices slipping below $49. The pair has a short-term uptrend line building around 1.2540. Start buying on dips under 1.26, eventually targeting 1.30.
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Why The Euro Could Surprise To The Upside
Its been a quiet night of dealing as currency traders close their books for the week, with EUR/USD seeing a slight bid in a Asian and early European session on mild optimism over progress in Russia and Ukraine talks and reassuring commentary from Brussels on Greece.
With geopolitical tensions calming in the Eurozone traders had a chance to focus on more prosaic economic data which showed a small upside surprise in both German and EZ GDP readings. Germany's preliminary GDP printed markedly better at 0.7% vs. 0.3% eyed while EZ GDP improved slightly to 0.3% from 0.2%.
While hardly torrid, the GDP figures for the region show that growth may be starting to accelerate as lower euro and lower energy prices provide a boost to both demand and supply. The key tell for the market will be the Flash PMI readings for the EZ due at the end of next week. If the data shows a pickup in activity - and there is good reason to believe that it will - the recovery in EUR/USD could be much stronger than the market thinks.
For now the pair is slowly churning its way towards the 1.1500 level, but if next week brings some kind of a resolution to the Greek crisis in conjunction with better economic data, the short covering squeeze in the EUR/USD could catch many late shorts flat footed and push the pair to the 1.1700 level over the near term horizon.
As for the greenback some profit taking continues against the buck with USD/JPY dipping to 118.40 in Asian trade before bouncing back towards the 119.00 level. Today the calendar is quiet, but traders will focus on the UoM survey data which is expected to rise slightly from the prior month. Any upward surprise could provide a mild lift for the pair but for now it remains capped at the 120.00 level as markets await more data points to confirm the thesis that the Fed will move towards normalization in the second half of the year.
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Time To Buy The USD Index – BofA Merrill
The US dollar has not exactly continued its winning streak in recent weeks, and has had mixed results. Is it time for a renewal of the uptrend?
The team at Bank of America Merrill Lynch thinks so. Here is there rationale, entry points and targets:
Here is their view :
For the past 3 weeks the USD Index has been caught in a well defined contracting range, notes Bank of America Merrill Lynch.
“Now that range is drawing to a close and the larger bull trend is about resume.As such we recommend buying the USD Index at 94.10 for resumption of the advance. A break of Triangle resistance (now 94.91) confirms a return to trend,” BofA projects.
“Upside targets are seen to 97.01 and potentially beyond. Pullbacks should not break the 34d avg (now 93.58), while a move below the Feb-03 low at 93.25 invalidates the bullish setup,” BofA adds.
In line with this view, BofA recommends buying the USD Index on a dip into 94.10, with a stop at 93.20, and a target at 97.01.
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Three things Yellen could say to surprise investors
While Fed Chairwoman Janet Yellen has generally received high marks for her public appearances before Congress, that is not to say there haven’t been missteps.
Who can forget last summer’s Fed’s report on monetary policy which questioned the high stock prices for social media and biotech firms. Yellen has since shied away from that level of specificity when discussing asset prices.
With that in mind, here are a few ways Yellen might catch Wall Street flat-footed during her two days of testimony on Tuesday and Wednesday.
Time to get going on rate hikes
Yellen would surprise markets if she said it was time to get going on rate hikes.
Wall Street is starting to think the first rate hike might not even happen in 2015 after finding a dovish undertone to the minutes of the January meeting released Wednesday.
The minutes showed that the Fed has two options on the table: a rate hike sooner so they can move slowly or a rate hike later followed by faster moves. The main takeaway from the summary of the discussion was that a majority on the Fed policy committee are leaning toward caution.
But Yellen and her key allies could actually favor a gradual process, thinking that this would be a more orderly process.
They could also be worried that rates at the zero bound are creating distortions or asset bubbles.
“They could feel it’s less disruptive starting now,” said James Glassman, economist at J.P. Morgan Chase.
Dollar weakness is making an impact
Yellen could surprise by discussing the negative impact on the economy from the strengthening dollar.
The dollar started rising against all currencies in 2014 and the trend has continued this year. A Fed rate hike is expected to push it even higher.
The ICE U.S. Dollar Index DXY, -0.09% , a measure of the dollar’s strength against six rival currencies, has risen steadily from around 79 in early May 2014 to more than 94 Friday.
Talking about the dollar is something the Fed tries to shy away from.
“Saying the dollar’s strength is counter-productive is a quagmire they don’t want to climb into,” said Mike Englund, chief economist at Action Economics.
But some economists think the negative impact of the dollar’s strength are getting harder and harder to ignore.
Brian Bethune, chief economist at Alpha Economic Foresights, said that the dollar’s strength is pushing down on already low inflation, cutting the outlook for economic growth and putting a bit of pressure on profit margins. Companies like Avon Products Inc. AVP, -3.21% , Colgate-Palmolive Co. CL, +0.04% and Dana Holding Corp. DAN, +1.48% have warned about the strengthening dollar.
Corporate titans “are sharpening the hatchet,” to cut back their work forces, as a result of weaker profit margins, Bethune said.
A frank discussion of the dollar’s impact on the economy would help investors understand why the Fed was remaining patient, he said.
If you want to audit us, go ahead
Yellen would surprise members of Congress if she dropped opposition to the measure to “Audit the Fed,” as the legislation is known as.
That bill would allow the Government Accountability Office to explore how the central bank reached a decision on interest rates.
But a few economists think Yellen would score points by giving in.
“The Fed has nothing to hide. Yellen should say if you want to pass a bill to audit us — do it,” said Adolfo Laurenti, chief international economist at Mesirow Financial.
Laurenti said the Fed’s opposition is overstated.
GAO reports veer between “irrelevant on one side and inconsequential on the other,” he said.
All are forecasting 1.05 for EURUSD by the end of the year now. They do know what we are not told, so ...
All are forecasting 1.05 for EURUSD by the end of the year now. They do know what we are not told, so ...
it depends now. If EU solves Greek crisis it could be understood as a victory for EU - and in that case at least a significant correction can happen
3 reasons why EUR/USD cannot really recover
EUR/USD moved up and even peeked above resistance, but with the peek came the peak and the pair turns down. It sticks to the same old range, trading below the close on Friday and is unable to break higher.
Yellen was quite cautious and the Greek crisis has been sidelined for now. So why can’t EUR/USD break higher out of range? Here are 3 answers.
1) What Yellen said
The initial reaction was a jump in the dollar, on the sense that a rate hike is imminent, and the next move was down, on a better understanding of what she said: a removal of forward guidance does not imply an immediate rate hike.
The dollar was weaker across the board and the euro gained against it as well. But what did she actually say? In general, everything is data dependent and she also expressed caution on jobs and inflation. Yellen was basically being Yellen – dovish as we have always known her.
But perhaps there is another explanation: perhaps she was preparing us for a removal of forward guidance in March: no more patience next month, and a potential for a rate hike – perhaps not imminently in April, but June is still on the agenda.
June was the earliest possible date anyway, so perhaps her words are not so dovish?
We will get a better notion with the upcoming jobs report next Friday. If it’s another great one, June is certainly on the agenda. If not, it’s September, which is not that far away.
2) Greece: Next crisis is not too far away
The Eurogroup approved the Greek list of reforms. That was excellent news for the Athens stock market. But now, it’s time for action and not only talk.
How much money has left Greek banks so far? Will SYRIZA hold together after the concessions? Will they ramp up tax collections? And basically, this is a four month extension, and this means that the next round is not that far off.
3) The Draghi Drag
ECB president Mario Draghi speaks later today, 16:30 GMT, in the European parliament and this is a great reminder of the stance of the central bank: they are about to launch a massive QE program.
And why? Inflation remains low and it’s not only oil prices. Core inflation remains low, and so does demand. Germany just had a 5 year auction that was negative: that means that investors lined up to pay the German government to take their money for five years.
This is a reflection of the upcoming QE but also of deflation. Wait, does it really matter? US bonds yields, even after Yellen, remain much more attractive than most European ones.
All in all, EUR/USD has only momentary reasons to rise, but the general direction remains down.
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