Euro Dollar Rate Forecasts for 2014-2015 - page 14
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Month-End Model Hints At Dollar Weakness
Background:
Traders often refer to the impact of ‘month end flows’ on different currency pairs during the last few days of the month. In essence, these money ‘flows’ are caused by global fund managers and investors rebalancing their currency exposure based on market movements over the last month. For example, if the value of one country’s equity and bond markets increases, these fund managers typically look to sell or hedge their now-elevated exposure to that country’s currency and rebalance their risk back to an underperforming country’s currency. More severe monthly changes in a country’s asset valuations lead to larger portfolio adjustments between different currencies.
In order to predict these flows and how they impact FX traders, we’ve developed a model that compares monthly changes in the total value of asset markets in various countries. In our model, a relative shift of $400B between countries over the course of a month is seen as the threshold for a meaningful move, whereas monthly changes of less than $400B are often overwhelmed by other fundamental or technical factors. As a final note, the largest impact from month-end flows is typically seen heading into the 11am ET fix (often in the hour from 10 & 11am ET) as portfolio managers scramble to hedge their overall portfolio ahead of the European market close.
As we stand on the precipice of a new month, it’s easy to look back and retroactively explain the trends and themes of May: Of course the dollar would resume its longer-term rally, the euro would be hit by fears surrounding Greece’s debt, the UK would fall into deflation, USD/JPY would break out from its unsustainably tight range and the commodity dollars would fall in sync with the rising US dollar. The problem is that we must live life looking out the windshield, not the rear view mirror.
Peering through the fog of the future, one immediate move we may see is a bout of US dollar weakness heading into the official end of this month this weekend. US bourses generally rose over the course of the month (the NASDAQ in particular tacked on over 3%), while most European and Asian indices were essentially unchanged (two exceptions: Spain’s IBEX index edged lower in May, while Japan’s Nikkei index rose over 1,000 points). In fixed income, bond yields rose sharply across the world, with the biggest relative move in Germany’s DAX index.
Given the slight outperformance of US equities, our model shows that global portfolio managers will have to sell US investments and buy other assets to rebalance back to their target allocations. As a result, we could see a bit of dollar weakness over the course of today’s trade, with EUR/USD, AUD/USD, and USD/CAD all reaching the +/- $400B threshold for a significant move in our model. The dollar selling, if seen, is expected to be more limited in GBP/USD, USD/JPY, and USD/CHF as a result of the smaller relative shifts between those countries’ asset markets.
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EUR: Time To Panic? – Credit Agricole
The clock is ticking towards the June 5th deadline for Greece, that scrambles to collect cash. Is the market too complacent about this crisis?
The team at Credit Agricole assesses the risks for the common currency:
Here is their view :
The Euro’s recent consolidation belies greater uncertainty about the outcome of the ongoing negotiations between Greece and its creditors. That fear seems evident in growing peripheral bond yield spreads and soft Eurozone stocks.
We suspect that, after EURUSD has dropped around 6bf from its lofty highs at around 1.15, the market view is that some negatives associated with Greece should be priced in. This is partly true.
That said, we believe that the markets maybe too complacent expecting an ‘easy’ deal between Athens and its creditors. Indeed, we doubt that Syriza will commit to a political suicide and back away from its ‘red lines’. In addition, absent market panic, creditors (especially the IMF) are unlikely to change their stance on Greece.
For FX markets this means that risks for EUR are still on the downside in the run up to next week’s IMF repayment. While we cannot exclude a last ditch effort to boost Athens’ cash position and avoid a default in June, further payments loom large in July and August and there seems to be not much appetite for a more comprehensive deal as of now.
Needless to say, uncertainty about Greek debt sustainability will likely linger given the country’s weak economic fundamentals and fiscal position.
Elsewhere, investors’ focus will turn to next week’s ECB policy meeting, which is unlikely to surprise on the less dovish side.
As such we remain of the view that EUR rallies should be sold.
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Negatives with Greece have already been priced in. Now they are going ot price in rumors (lies) that the deal is close
A USD Story But EUR Still A Good Short; Sell EUR/USD – Deutsche Bank
he US dollar has been left, right and center in recent days, but there are two sides to a currency pair. The euro did receive some positive economic indicators, but Greece looms.
The team at Deutsche Bank explains why EUR/USD is still a good short:
Here is their view:
In a note to clients, Deutsche Bank updates its outlook on EUR/USD where DB is structurally bearish arguing that even as the pair has seen one of the largest drops in history over the last twelve months, the trend has more to go, but this time led by dollar strength, rather than euro weakness.
In particular, DB advises clients to stay short EUR/USD, and to add to their shorts at current levels. The following are some of the main reasons that DB outlined behind this argument, along with its targets for that short EUR/USD trade.
Pain after gain, but it should be over. “EUR/USD has squeezed higher over May, but the technicals now look more supportive, suggesting the move is behind us,” DB projects.
Cleaner positioning. “Equally, positioning metrics suggest that dollar longs have being pared back. A regression of currency manager index returns against the DXY now points to flat positioning, while the IMM shows a greater than 50% paring back in dollar longs,” DB notes.
All about the Fed. “History has been all about the ECB, but the dominant driver of FX is now likely to be the Fed. On that front, monetary policy could come back in focus sooner than many expect,” DB argues.
Euro still a good short. “While market focus is very likely to shift to the other side of the Atlantic, EUR/USD is still a good vehicle to express dollar longs. To start with, the euro is a consistent underperformer around Fed turning points,” DB advises.
Negative Euro flows. “Beyond that, the European flow picture remains very negative. The recent VaR shock in bund yields is likely to further discourage, rather than encourage fixed income inflows,” DB adds
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When Deuthche Bank recomends to stay short on Euro, we have the biggest market maker preparing the market for itself
When Deuthche Bank recomends to stay short on Euro, we have the biggest market maker preparing the market for itself
Everybody is doing that. It is a done deal : what do you think EU got for political concessions?
When Deuthche Bank recomends to stay short on Euro, we have the biggest market maker preparing the market for itself
For what happened today
:):)
The consensus believes in EUR/USD to parity and a Sept Fed hike
FX survey from SocGen
SocGen is out with the results of a survey for a fairly even composition of their clients (corporates, hedge funds, etc) with regarding to mainly their expectations for the ECB, the Fed, along with their current EUR/USD trading strategies. The following are a selection of some of the key results from this survey:
EUR/USD. Investors believe that the ECB is targeting parity and do the same but the downside targets are now less aggressive while top side targets are rising. Trading behaviour is relatively unchanged. 63.3% are sellers of EUR/USD on rallies and 12.7% are buyers on dips.
ECB. The market expects the end of ECB QE in Q3 2016 and the first rate hike in H1 2018 but with a significant amount expecting it as early as Q1 2017.
Fed. The market expects clearly the first rate hike in September and believes that the Fed rate hikes will be slower than what is priced in. The market is mostly neutral in its duration with a distribution evenly split between long and short.
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What does it matter what ECB is targeting. They did not suceed in what they promised long time ago - why should it be different this time?
EUR/USD erases the Draghi rally on the NFP – levels to watch
One big event giveth, the other taketh away. A weekly gain worth almost 400 pips was reduced to only 100 pips, mostly due to the excellent US jobs report.
Draghi’s reluctance to express worries about bond market volatility or commit to front loading QE. Together with some unconvincing US data, EUR/USD rallied hard. At one point it hit resistance at 1.1373, which was a peak back in November 2013.
Update: the pair continues falling to support at 1.1050.
However, as the bond and especially the bund sell-off calmed down and partially reversed, the pair dropped over 100 pips. Also Greece’s latest actions weighed on the common currency.
Yet the biggest blow came from the US NFP. With strong job gains, a rise in wages and also a sign of a widening work force, the greenback could not be stopped. Here is an analysis of the report.
At the time of writing, EUR/USD is trading at 1.1083, exactly 100 pips above the close last week. There are still a few more hours to trade. The critical line of support is 1.1050 – this is undoubtedly a separator of ranges.
Further support awaits at the round 1.10, followed by 1.0910. Resistance awaits at 1.1190.
Here is how it looks on the chart:
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