Euro Dollar Rate Forecasts for 2014-2015 - page 7

 

Economic weakness reaches jobs, but what will you buy instead of USD?

The gain of only 126K jobs in March is a bitter disappointment. Coupled with downwards revisions of 69K makes it worse.

We are finally seeing the labor market catching up with the dismal economy. Is this enough for a change of course for the US dollar? Or just an extension of the correction? Or in a different manner: is the dollar about to lose its “cleanest shirt in the dirty pile” status?

Economic weakness outside the Fed mandates

For quite a long time, many US economic indicators disappointed: durable goods orders stood out with a streak of disappointment, casting worries about future economic growth. Also the manufacturing figures, such as the Chicago PMI, factory orders and the ISM manufacturing PMI were on the downside.

Nevertheless, on the two main fronts of the Fed, things were looking good. Inflation actually ticked up in both the Core CPI and the Core PCE Price Index, which matters even more to the Fed. This is one of the Fed’s mandates.

The second mandate of the Fed is employment, and here things were looking great: a blockbuster NFP after another. The last one, published on March 6th showed a gain of nearly 300K before revisions.

Also the weekly jobless claims were looking better, with consecutive downfalls in recent weeks. The miss on ADP served as a warning sign, but it wasn’t close to this miss.

Until Now

A gain of only 129K private sector jobs and 126K in total is very disappointing, and so are the downwards revisions worth 69K. The weather can be easily blamed for the revisions: January and February are winter months.

But the bigger disappointment came from March, that already featured good weather. In addition, the US experienced a worse winter last year. Wasn’t the economy supposed to be stronger and more prepared for such a downturn?

The report may be shrugged off as a one-off. After all, the world’s largest economy enjoyed 12 months of +200K jobs gained per month, in the best series since the 90s. One report is not telling about the economy. The report also featured a stronger than expected monthly gain in wages: +0.3%. So, it looks a bit weird in general.

State of the Fed

We’ll only know if this was a one-off in early May, when we get the next jobs report. For now, the picture does not look pretty.

The Fed convenes later this month. They will already have the first read of Q1 GDP growth on their desks, but not the fresh jobs report. With what we know now about growth in Q1 and about jobs, the Fed could send a more dovish message.

The US dollar does not wait for the Fed and is already reacting, with EUR/USD topping 1.10.

But what will you buy?

But yet again, even if the US economy doesn’t look so good, what else will you buy? The ECB has its leg on the QE pedal, election uncertainty looms in the UK, the BOJ is failing to create inflation, another rate cut is due in Australia and the Iran deal does not bode well for the C$.

How will markets react next?

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Goldman Sachs reactions to the nonfarm payroll report on Friday

Responses to the NFP report from various banks are incoming - here is Goldman Sachs:

Jan Hatzius ... the March jobs report is a "pretty weak report, even though you could blame a decent amount on weather"

  • The March jobs report reflects a "pretty sizeable downward revision for the last two months"
  • Also notes the "drop in U6 to 10.9%."
  • Says it "looks like a significant weather impact, construction is down 1,000
  • Leisure and hospitality weak at 13,000... There is quite a bit of weather (impact) in here."
  • Notes that the the household survey is "also weak."
  • And, more from GS:

  • We "continue to forecast the first hike in the Fed Funds target range at the September meeting. However, today's number adds to the risk of a later hike"
 

EUR ... a negative outlook from Morgan Stanley

Morgan Stanley's monthly currency outlook sees them continue with a negative outlook on the euro:

  • We have maintained our base case forecast for EUR/USD of 1.05 by year-end
  • We believe that there is now an increased risk of moving towards our bear case projection of 0.90
  • MS cites:

    • The impact of QE/negative rates
    • The increasing use of EUR as a funding currency
    • The ongoing risks regarding Greece
    • All of which "continue to provide a negative outlook for EUR"

      They go on with more comments on Greece:

    • Increasing risks regarding Greece, in particular the lack of progress in negotiating the terms of structural reform required for bailout funds to be released
    • The risk of policy mistakes taking Greece closer to an exit from the eurozone has increased, in our opinion, although we still place the probability of a Greek exit at 25%
    • However, there is now a greater risk of additional measures, such as capital controls, being required to keep Greece in the euro, we believe
    • Taking these adjustments to the risk assessments, overall the probability of EUR/USD declining below our base case 1.05 forecast has increased, hence the renewed emphasis on our bear case projection for EUR
    • At the time of writing, the Greek government is preparing details of the structural reform measures to present to the EU. If these are not accepted and bailout funds are not released, Greece's position is likely to become more perilous, leaving EUR increasingly vulnerable

    The start of the ECB asset purchase program initially drove EUR/USD down to our year-end target of 1.05 by mid-March

  • EUR has subsequently been able to benefit from the broader post-FOMC USD correction
  • However, it is interesting to note that the EUR/USD rebound has been relatively moderate, given the extent of the decline seen over the past six months and the degree of position unwinding which appears to have taken place
  • We believe that this is a function of the structural outflows from EUR which are continuing, while any investment inflows appear to be currency-hedged, which together are set to keep EUR under pressure
  • Despite the EU-US yield spread moving higher, supporting the EUR/USD rebound, it is interesting to note that EMU yields continued to move lower, implying that the correction was being driven by the US side of the equation, with EUR indicators continuing to generate negative signals. Hence, the EUR downtrend is set to remain in place, in our view.

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Guys, don't forget : ECB will not raise rates for at least next 2 years. Quite the opposite. Don't fall victims to a false recovery

 

EUR/USD: Whether The Weather – BofA Merrill

The weak US Non-Farm Payrolls were blamed on the weather. While this finger pointing didn’t initially help the dollar, the greenback is recovering as traders come back from their Easter holidays.

The team at Bank of America Merrill Lynch analyzes the next move in EUR/USD:

Here is their view :

“In our view, the key question is whether the recent slowdown in US growth is due to temporary factors. In particular, how important has been the role of the weather and how much of the slowdown can be attributed to it.

After the release of the March NFP on Friday, the market has pushed back the first full Fed hike to October and EUR/USD moved above 1.10.

…For investors who share our view that as the weather turns the economy will rebound quickly, we believe this creates an opportunity to start building short positions in the front-end of the US yield curve and adding to long USD positions, especially just before the release of the critical March retail sales data on 14 April.

We have been recommending a Treasury-Bund spread tightener for a while. With the spread tightening 30bp in the past few weeks, we think this is a good time for investors who have made money on the trade to consider locking in the profits.

We are confident the EUR/USD downtrend will resume at the first sign of arrival of a warmer spring.”

David Woo and Shyam Rajan – Bank of America Merrill Lynch

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SocGen's 4 Reasons Why The Euro Will Keep Falling

After the abysmal March payrolls last Friday, the EUR briefly spiked only to lose all of its gains over the next two several days and then some. And if SocGen is correct, the European currency has much more room to fall. The reasons are not new, recapping what is already widely known, however those wondering why the EURUSD just took out its low stops for the day, the following 4 reasons from SocGen's Patrick Legland should be a useful refresher why Euro parity may be coming faster than most think.

Reason 1: strong bond outflows set to continue

In Q1 15, the euro depreciated against all major currencies (JPY, GBP etc.). Having dropped sharply since May 2014 (-22%), the EUR/USD is now tracking relative yields more closely (see chart). With disappointing US economic data in Q1 – including nonfarm payrolls well below expectations last week (126k) – the EUR/USD could remain range-bound near term, as markets are pricing in a slower pace of rate hikes by the Fed. But the desynchronisation of central bank policies is a long-term theme, with euro rates expected to stay low, while US and UK rates should rise in the medium term. With eurozone yields stuck at extremely low levels, investors must reallocate their investments into higher-yielding assets, in part overseas. Given the large amount of maturing European principals and coupons to be reinvested in 2015 (c.€1.15trn), this could lead to strong outflows over the next quarters and weigh on the euro.

Reason 2: Lingering political risks on Greece and Spain

On 20 February, the Eurogroup agreed to extend the Greek programme until late June and to provide €7.2bn of new funding to Greece on condition that the government passes economic reforms by the end of April. The country is running out of cash but faces only small repayments before the summer, while sizeable payments are due from 20 July onwards. According to our Rates strategists this could lead to continued brinkmanship for some months yet, but no significant change in the status quo. As a result, Greek banks will remain under pressure, as illustrated by the acceleration of deposit outflows (see chart). Our economists’ base case is still that a solution will be found to kick the can further down the road, but the risk of a “Grexit” is not negligible. In Spain, the electoral marathon, which started last month, could increase political instability, with Podemos’ progress to be monitored.

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3 Reasons Why EUR/USD Upside Limited; We Stay Short – BNPP

EUR/USD has recovered, but certainly didn’t go too far and is struggling to advance. Some see the recent slide as a correction within a change of course and see more upside.

However, the team at BNP Paribas notes 3 reasons why the upside for the pair is limited. They set lower targets:

Here is their view :

The USD is regaining composure in the aftermath of last week’s soft jobs data, although US yields remain under pressure.

In this regard, BNP Paribas doesn’t believe that the US soft payroll number marks a major turnaround to the US dollar uptrend and to EUR/USD downtrend accordingly. BNPP outlines 3 reasons behind this view:

“First, our economists continue to see 70% probability of a Fed hike by September and comments from New York Fed President Dudley on Monday did not signal excessive alarm over the jobs report that would change the Fed’s base case scenario for policy tightening this year,” BNPP clarifies.

“Second, rates markets are already expecting a much more dovish outcome than the Fed, with less than two hikes priced in over the next year, implying that the scope for US yield upside is much larger than the downside,” BNPP argues.

“Finally, foreign central bank policy, notably QE by the BoJ and the ECB, is supporting the underlying asset-reallocation flows that benefit the US dollar as investors in the eurozone and Japan are pushed into overseas markets in search for more attractive nominal and real yields. The latter point is underscored by EURUSD’s inability to spend any much time above 1.10,” BNPP adds.

In lie with this view, BNPP remains short EUR/USD via spot from 1.099 targeting 1.04.

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Opportunity Knocks For USD Bulls: Levels & Targets – BofA Merrill

The greenback has made a comeback of sorts, rising from the lows it suffered following the poor Non-Farm Payrolls. However, the jury is still out on whether the trend has resumed.

The team at Bank of America Merrill Lynch sees opportunities for USD bulls against the EUR, GBP and the JPY as well as the dollar index:

Here is their view :

In a note to clients today, Bank of America Merrill Lynch technical strategy team updates its outlook for the USD Index, USD/JPY, EUR/USD, and GBP/USD.

Starting with the USD Index, BofA thinks that its recent correction does not yet look complete as evidence says that we should see a decline to the 95.00/94.50 zone before the larger bull trend resumes for the 106.00 area.

“USD Index bulls need a break of the Mar-31 high at 98.67 to say that the correction is over and that the bull trend has resumed,” BofA argues.

In contrast, BofA thinks that USD/JPY looks far more bullish noticing that its 4m range trade looks to be in its final throes.

“While allowing for one last pullback toward 118.78 (4m Triangle support), pullbacks should be bought. Upside targets are seen to 124.16/124.59, ahead of 128.45. Below 118.33 (Mar-26 low) invalidates the bullish setup,” BofA projects.

Moving to EUR/USD, BofA holds the view that EUR/USD correction could still extend gains to 1.1267/1.1389 before renewed topping and a resumption of its l/term downtrend towards 1.0283/1.000.

Same for GBP/USD, where BofA thinks it can extend to 1.5169/1.5325 before resuming its long term downtrend to 1.4035/1.3504.

“USD bulls need a EUR/USD break below 1.0713 (Mar-31 low) and GBP/USD break below 1.4750 (Apr-01 low) to say that the USD bull trend has resumed,” BofA argues.

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Dollar Drop Signals World’s Best Forecaster to Start Buying

It’s time for investors who bailed on the dollar in the past few weeks to get back in, says the most-accurate currencies forecaster.

The greenback has tumbled 3.7 percent versus the euro since touching a 12-year high last month amid speculation the Federal Reserve will delay raising interest rates -- in part because the dollar’s strength is hurting U.S. economic growth. That concern is overblown, according to ING Groep NV, which topped Bloomberg’s rankings of foreign-exchange analysts for the second quarter in a row.

“The market is now pricing in a very subdued pace of the tightening cycle -- we disagree,” Petr Krpata, a foreign-exchange strategist at ING in London, said on April 1 by phone. “We just see the latest correction as a perfect opportunity to get into the trade again.”

Even with the recent reversal, the dollar has rallied against all of its major peers since mid-2014 as the Fed’s plans to raise interest rates attracted cash to the U.S., at the same time that central banks from Europe to Japan boosted their stimulus. That momentum halted when Fed officials cut their forecasts for rate increases last month and alluded to the currency’s drag on exports.

Export Effect

ING sees the Fed raising rates this year even after an April 3 report showed the U.S. added the fewest jobs last month since December 2013. That makes buying the dollar versus the euro the best play in currency markets, according to the Amsterdam-based bank, among the first to say the currency pair will achieve parity this year for the first time in more than a decade.

“The stronger dollar doesn’t necessarily have to change the U.S. economic prospect,” said Krpata, who helps compile ING’s forecasts along with London-based head of currency strategy, Chris Turner.

Exports account for only 14 percent of the American economy, according to World Bank data. That’s the least among Group of 10 nations, and compares with 30 percent for Canada, 46 percent for Germany, and over 80 percent for the Netherlands and Belgium.

ING forecasts the dollar, which rallied 0.6 percent Tuesday to $1.0847 per euro at 1:27 p.m. in New York, will strengthen to parity by mid-year and reach 95 cents by Dec. 31. That’s more bullish than the median year-end estimate of $1.05 in a Bloomberg survey of 69 strategists and economists. It reached $1.0458 on March 16, the strongest since January 2003.

ECB Stimulus

While monetary authorities worldwide have slashed borrowing costs this year to revive growth, an unprecedented bond-purchasing program by the European Central Bank, amplified by negative interest rates, has made the single currency a prime selling target for investors.

ING topped Bloomberg’s rankings of foreign-exchange analysts for the four quarters ended March 31, after also leading the previous period.

The best forecasters in Bloomberg’s rankings were identified by averaging individual scores on margin of error, timing and directional accuracy across 13 currency pairs during the past four quarters.

Banks had to be ranked in at least eight of the pairs to qualify for the overall placing, with 60 succeeding. ING’s score of 60.98 compares with No. 2 Credit Suisse Group AG’s 60.71.

Rally ‘Done’

Saxo Bank A/S took third place, with a score of 60.58, and was the best forecaster for the euro-dollar pair after being the most bullish on the greenback at the beginning of the year.

Now, Saxo strategists say the rally may be exhausted following nine straight months of gains.

“Most of the move is done,” John Hardy, head of foreign-exchange strategy at Saxo Bank in Hellerup, Denmark, said in a April 4 telephone interview. “There could be some more in it, but increasingly it’s going to become a two-way trade.”

Credit Suisse is in ING’s camp and predicts the dollar will reach parity with the euro by the end of this year. The Zurich-based bank, which pushed its forecast for the Fed raising rates to September from June, still sees it as the one central bank moving toward tightening.

“You need to see a lot of more these negative signs before the whole story changes,” Alvise Marino, an emerging-markets currency strategist at Credit Suisse in New York, said in a phone interview. The dollar will climb as “the main trading partners of the U.S. are all easing.”

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3 Reasons Why EUR Broke 1.07

In the last four trading days the euro has taken out 4 big figures. On Monday, the currency was trading as high as 1.1035 versus the US dollar and Thursday it fell to a low of 1.0637. While the divergence in Eurozone and U.S. monetary policy provides the broad fundamental driver for EUR/USD weakness, disappointing Eurozone data, positive economic surprises from the U.S. and the fact that Greece is still making headlines is bad news for the euro. The latest sell-off was driven by no less than 3 key factors -- low Eurozone yields, stronger U.S. jobless claims and reports that the Eurozone has now given Greece a 6-day deadline to come up with a revised reform proposal if they want access to further bailout funds. According to Eurogroup officials, progress is being made but so far no one is satisfied with the steps that Greece has taken and the decline in the euro clearly indicates that investors are skeptical about the country's ability to come up with and then follow through with a credible plan. For as long as that remains the case, the risk of a Grexit remains on the table. At the same time, yields across Europe remain low -- 10-year German and French yields were unchanged as Treasuries rose 5bp. With banks charging a negative deposit rate, there are few alternatives for European investors other than to convert their euros into other currencies and invest in assets like U.S. bonds. Since these conditions are not expected to improve anytime soon, we expect further losses in the EUR/USD. Now that the March 31 low of 1.0713 has been cleanly broken, the next target for the currency pair will be 1.05 as the double top in the EUR/USD plays out nicely.

Dollar Extends Gains, IMF Warns of Bumpy Ride Ahead

U.S. rates are on the rise, driving the dollar higher against all of the major currencies. It took a while for Treasury yields to turn positive but when they did, it helped the dollar break through key resistance levels versus the euro and yen. Thursday morning's jobless claims report helped to set off the currency's rally. Only 281k claims were filed the week ending April 4, extending the string of sub-300k prints. That was the fifth straight week with jobless claims fewer than 300k, a trend that reinforces our positive outlook for the U.S. labor market and hardens the Federal Reserve's plans to raise interest rates. Slowly but surely, investors are reloading their long dollar bets, banking on a rate hike between June and September. While we are in the later camp, a solid case could be made for raising rates sooner. An increase in rates this year is such a certainty that global policymakers have begun talking about what the world will look like once the Fed begins hiking. IMF Managing Director Christine Lagarde warns of a "bumpy ride" with emerging economies and overpriced assets taking the biggest hits. "A long period of low interest rates in the U.S. and other advanced economies has fostered a higher risk tolerance among investors" and when the Fed starts to tighten, "liquidity can evaporate quickly." In some ways she is absolutely right because stocks are hovering near record highs and the bond market has yet to correct. A rate hike by the Fed should drive both stocks and bonds lower. While many have talked about the "imminent" bond-market correction, no one is positioning for a reversal in equities. The only piece of U.S. data scheduled for release Friday is import prices, a report that is not expected to have a significant impact on the dollar.

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