Euro Dollar Rate Forecasts for 2014-2015 - page 30
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Scope For EUR/USD To Fall Between 6 To 10 Big Figures – Goldman Sachs
EUR/USD made an upwards move on the heels of the Fed decision but eventually returned down to the drawing board.
What’s next? The team at Goldman Sachs sees a downturn worth 600-1000 pips:
Here is their view :
In a note to clients today, Goldman Sachs discusses the outlook for EUR/USD, where GS economists now expect a continuation of QE into mid-2017, well beyond the original end date of September next year. The following are the key points in GS’ note along with its latest EUR/USD forecasts.
“1- Our European economics team expects QE to run through end-2016 at its present run-rate of EUR 60bn per month, with purchases ending mid-2017 after tapering in the first half of the year. This represents a material up-sizing of the original program and should weigh on the single currency.
2- Last year, in the run-up to ECB QE, we spent lots of time mapping ECB balance sheet expansion into EUR/$. The various approaches we tried converged on EUR 1 tn mapping roughly into 10 big figures in EUR/$ downside,” GS argues.
Against that backdrop, how does GS see the outlook from here?
3- “Our models say that 4 big figures in the recent rise in EUR/$ are due to mounting risk aversion on China fears. A program extension of the size envisaged by our economists could mean another 4 big figures, but we see this as a lower bound. That is because there is scope to better anchor Bund yields, after the Bundesbank reduced the maturity of its purchases earlier this year (Exhibit 3).
4- In our view, a core aspect of any QE program needs to be to crowd investors out of the safe haven asset, which means keeping Bund yields low and stable (much as the BoJ did after the initial bout of volatility in May/June of 2013). We think this provides some additional downside for the Euro, since our balance sheet analysis does not factor in duration,” GS adds.
5- “Depending on how credible an upsizing to ECB QE is, we therefore see scope for EUR/$ to fall between 6 and 10 big figures, including positive effects on risk appetite,” GS projects.
GS maintains its 12-month forecast for EUR/$ to 0.95.
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EUR Set To Stumble On Dovish ECB - BNPP
The ECB is likely to take up the baton from the Fed as the central bank in the news in the week ahead with a number of speakers scheduled including Coeure, Nowotny and Praet today and Draghi on Wednesday, notes BNP Paribas.
"We expect more dovish communications particularly in the context of persistently firm EUR, building up to an expansion of the QE program at the December meeting. Our economists also expect September business sentiment surveys on Wednesday and Thursday to surprise to the downside," BNPP projects.
"Elsewhere, over the weekend Syriza emerged from a second election in eight months winning 145/300 seats in parliament, therefore likely being able to form a coalition with the Independent Greeks party. Such a coalition will be pro-European," BNPP adds.
"All-in-all, a dovish ECB, weaker data and a risk-neutral Greek election outcome should weigh on the EUR," BNPP argues.
BNPP continues to position short EURUSD and EURGBP via options.
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EUR: Fading Safe Haven Appeal - Credit Agricole
The recent price action in EUR suggests that the negative link between the single currency and the European equities maybe softening. Indeed, the 1M correlation between EUR/USD and Eurostoxx index, while still negative, has now bounced off the summer lows. Understanding the negative correlation helps explain the EUR’s resilience. In particular, it seems driven by investors’ unwinding of longs in EZ stocks and EUR-shorts that were used to hedge the asset exposure. The latest price action would suggest that a sizeable chunk of the EUR-shorts have been taken off the table, consistent with the latest sharp reduction in the speculative market shorts in EUR/USD (using CFTC data).
The correlation between EUR/USD and risk appetite can turn even less negative from here given that short-EUR hedges have become less attractive because EUR/USD was largely drifting higher after hitting a multi-year low in March.
This could diminish the EUR's safe-haven appeal and allow other FX drivers play a greater role than before. In particular, we expect that the relative policy outlook could become a dominant force behind EUR/USD and EUR/GBP, pushing them lower yet again in the near-term.
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Breaking Up With The Buck But Selling Euro - Deutsche Bank
In a note to clients today, Deutsche Bank argues that there are many signs suggesting caution on the dollar into year-end, projecting a break of a different kind as markets head into winter where the broad trade-weighted dollar enters a period of consolidation, or even tactical weakness in coming months.
"While we have been consistent dollar bulls so far in 2015, we are turning more cautious," DB argues.
1- Dollar technicals point to exhaustion. "The pace of broad trade-weighted dollar appreciation is close to record highs, but this is not the only warning sign... The picture is similar when comparing the current rally to the last three major dollar turns in the 1980s, 1990s and 2000s respectively: the move is ahead in all but one of the three previous cycles," DB argues.
2- Positioning build-up a worry as well. "It is not just that price action is stretched but positioning is problematic as well. Historically, the dollar has a well-documented pattern of weakening after the beginning of the first Fed rate hiking cycle," DB adds.
3- Dollar has done more than relative growth as well. "Beyond technicals and positioning, the dollar has overshot the relative growth outlook as well. Regressing the USD against relative US – global data surprises we find that FX has run ahead by more than 5% compared to the relative cyclical picture," DB notes.
Despite this, DB still expects a weaker EUR/USD through year-end, because the correlation between the euro and the broad dollar has broken down.
"Persistent negative portfolio flows, risks of additional ECB easing and lighter positioning still favour a weaker euro," DB argues.
"We remain bearish and therefore like selling EUR/USD targeting the year’s 1.05 lows by end-15. We are accordingly revising our year-end forecast to the same level keeping the overall downward profile intact. We also like selling EUR/SEK and EUR/GBP targeting 8.80 and 0.68 respectively," DB advises.
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EUR/USD: A Deja-Vu Shooting Star; Evolving Within H&S - SocGen
After testing key support at 1.05/1.04 in March, EUR/USD has embarked on a recovery that has been encompassed within an upward channel and appears to be a flag which is normally associated with pullbacks in elongated downtrends, notes SocGen.
"This price action resembles to the one back in late nineties, then too EUR/USD underwent pullback in a similar upward channel and it finally ended with a shooting star like the one formed last month," SocGen adds.
The shooting star along with monthly indicators which are close to resistance suggest, according to SocGen, that the recovery is likely short-lived and the pair could have been already set to resume its downtrend.
"Flag support at 1.0940 will hint at a retest of 1.08 and even a move towards multi decadal channel at 1.05/1.04 which remains a decisive level for next phase of downtrend," SocGen argues.
"Short term, EUR/USD has been experiencing unsettled price action as highlighted by sharp up and down swings. Currently it is forming a head and shoulder pattern. Near term rebound, if any, is likely to be confined to 1.1440, more importantly at 1.1565, the 76.4% retracement from last month highs," SocGen projects.
Life After The Fed: 3 Reasons For Tactical USD Longs - BofA Merrill
Markets continue to digest the Fed’s “dovish hold” last week, and the FX market is no different, notes Bank of America Merrill Lynch.
"Knee-jerk USD weakness was understandable given the dovish elements of the statement, which exceeded even dovish expectations. But, the dollar has since reversed its losses and remains higher than pre-FOMC levels. With the near-term rate outlook significantly less certain now, and complications due to the ongoing China-induced volatility, investors may be hesitant to re-engage USD longs at the current juncture," BofA adds.
While acknowledging that near-term caution is warranted, BofA believes three factors suggest tactical USD longs could make sense:
1. USD longs are significantly less stretched than they have been over the past one or two years. "Despite the dovish response to the Fed’s no-hike last week, some context on positioning is important, and could shed light on the USD’s outlook. Since the USD rally began in mid-2014, stretched positioning has been a common refrain for those looking to avoid re-loading USD longs. USD long positioning is now at its lowest level since the dollar rally began," BofA clarifies.
2. Don’t miss the forest for the trees. "Despite the Fed’s dovish tone, US fundamentals remain strong and will likely trump short-term distractions from China. This ultimately supports rate hikes in December, as our US Economics team believes ," BofA argues.
3. Markets thus far seem to under-appreciate the risk of other central banks taking action. "The USD’s resilience since the Fed, in part reflects the expectation that other central banks like the ECB will have to ease policy further with the Fed having taken a pass...In a similar vein, the significant nominal effective appreciation of the Yen (close to the level when QQE was expanded in October 2014), could pressure the Bank of Japan (BOJ) towards further action as well," BofA adds.
"Combined with reduced USD long positioning, a strong response from global central banks could provide an impetus for the next leg higher in the USD," BofA concludes.
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EUR/USD: Pause Before An Eventual Breakdown - Credit Suisse
EUR/USD has been trapped in a broad sideways range since March this year, notes Credit Suisse.
"However, with a multi-year top in place following the collapse below the 1.2043 low of 2012, we correspondingly view this as a pause before the core bear trend resumes," CS argues.
CS thus continues to look for an eventual breakdown in EUR/USD below the May/July lows at 1.0819/09 to trigger a test of the March 2015 1.0458 trough low.
"We would again allow for an initial hold here. However, beneath it can see the medium-term trend turn lower again for our long standing core bear objective at 1.01/.99," CS projects.
"Resistance shows first at 1.1460, above which would warn of strength back to 1.1714, and more likely the 38.2% retracement of the 2014/2015 collapse at 1.1808/11," CS adds.
Short-term, CS looks for a retest of the 55-day average at 1.1122 and a clear eventual extension beneath to test the September low at 1.1087 next.
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EUR/USD: Revising The Downside - Barclays
"We have revised higher our EURUSD forecasts to reflect considerable changes to the global outlook and the common currency’s recent resiliency versus the USD, but maintain our expectation of significant further downside in EURUSD.
Adjustment of China’s FX regime and increased concerns about Chinese growth, have materially increased downside risks for euro area growth and inflation, but they also appear to have pushed back expectations for Fed tightening. These developments, in conjunction with the EUR’s resiliency, have led to a tightening in euro area financial conditions that we expect will push the ECB to respond with further easing.
The ECB’s actions likely will reinstitute trend EUR weakness, as it serves to remind markets of the euro area’s more fragile recovery relative to other G10 economies, but the descent may be slower than we previously expected.
We forecast EURUSD to depreciate to 1.03 by yearend and below parity by Q2 2016."
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EUR/USD: Wave-2, Bullish Engulfing; Fade Upticks? - Nomura, SocGen, Barclays
The technical strategy teams at Nomura, SocGen, and Barclays Capital provide their vievws on EUR/USD technical set-up
Nomura: Wave-(2) targeting 1.1282/1325 ahead of fresh turn lower.
"EUR/USD completed its 5-wave decline lower than expected and a large portion of the corrective process is complete. Wave-(2) has a target zone between 1.1282/1325 and that is expected to renew the larger downtrend. S/t, 1.1273/82, the first resistance zone, is made up of A=C symmetry and the 50% retrace. 1.1320/25, the second resistance zone, is the bullish base projection and the 61.8% retrace. For today we expect marginal upside to the resistance zone to be contained," Nomura projects.
SocGen: Breach below 1.1085 is needed for further retracement.
"EUR/USD has formed a bullish engulfing near lows formed earlier this month at 1.1085 which also corresponds with the 50% retracement of the recovery so far since March. Thus 1.1085 will be an immediate support and only a break below will confirm further retracement towards channel limit at 1.0940," SocGen argues.
Barclays: Fade upticks Against 1.1330.
"We are bearish and would prefer to fade upticks against the 1.1330 area. A move below our initial downside targets near 1.1085 would confirm downside traction. Our next targets are towards the 1.1000/20 area and further out towards 1.0810," Barcalys advises.
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EUR/USD 'Barely Worth Trading'; Here Are The Trades We Like - SocGen
"Market volatility has been elevated following the Chinese FX regime shift and has remained so despite the Fed delaying its rate lift-off. Pressure on risk assets have persisted, and the fragile market sentiment is restraining G3 bond yields, which are in turn constraining EUR/USD and USD/JPY in tight ranges...
...In terms of near-term risk-reward, we favour shorts in NZD against AUD for relative value and against the yen for the extra ‘oomph’ we get if global markets catch fright.
We like shorts in CHF/SEK as the case for such negative rates in Sweden slowly fades.
We like long-term shorts in GBP/JPY as the UK growth rate crests and Brexit risk flares higher.
Being short the G10 economies with the biggest current account deficits appeals too. USD/CAD and EUR/NOK are too oil-sensitive to have conviction about here. For choice, we like to be short NOK and CAD in the very short-term.
As for EUR/USD, it’s barely worth trading. It fell this week with the VW share price, and having a view on where it goes next is way outside my skill set."
Kit Juckes and Alvin T. Tan - Societe Generale