Euro Dollar Rate Forecasts for 2014-2015 - page 31
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EUR/USD: Euro Not About The Dollar Any More - Deutsche Bank
"EUR/USD has strengthened over the summer despite the large dollar rally. This reveals a significant shift in the underlying drivers away from the broad dollar trend. The negative correlation between the world’s two major currencies dropped to the lowest on record this year and has structurally turned.
Indeed, running through a list of more than 30 financial markets drivers shows that European equity markets and rates are now the dominant drivers of EUR/USD in a similar idiosyncratic dynamic to the yen. Draghi protection remains in place The euro has already overshot rate differentials with the US, with both nominal and real spreads suggesting fair value below 1.10.
Euro funded position unwinds and risk-aversion may be the underlying drivers, but we believe this is likely to have run its course. First, the ECB has indicated that it will not tolerate an additional tightening in financial conditions. Further risk-aversion will be followed by ECB easing putting renewed pressure on the euro. The EONIA curve still reaches an inflection point next year suggesting the market is not pricing an aggressive extension of the PSPP program. Second, even if aggregate dollar longs on the IMM are extended, both euro and yen shorts now stand at the lowest in more than a year. There is plenty of scope to re-build positions irrespective of the broad dollar trend.
We remain bearish and therefore like selling EUR/USD targeting the year’s 1.05 lows by end-15."
Staying Short EUR/GBP Targeting 0.70 – Credit Agricole
The pound has dropped quite a lot after last week’s rally, and the pain is seen also against the euro.
Nevertheless, this could be actually a buy opportunity for sterling against the common currency. The team at Credit Agricole explains:
Here is their view, courtesy of eFXnews:
The GBP has been capped of late, mainly due to falling expectations of the BoE being close to consider higher rates anytime soon. The central bank’s chief economist Andy Haldane just recently indicated that subdued world growth and prices, and the higher currency, whose effects in lowering import prices have yet to fully pass through, make him less confident in raising interest rates.
However, it must still be noted that constructive domestic conditions have been preventing medium-term inflation expectations from falling. In that respect it must be noted that 5Y forward breakeven rates have remained well supported close to 3%. This stands in contrast to the Eurozone, where muted growth conditions and the higher EUR have been increasing downside risks to inflation.
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BANK OF AMERICA: Things will have to get a lot worse before we can start talking about a recession
The global economy might not be booming, but it's going to have to get a lot worse before we start talking about a recession.
In a note to clients on Thursday, Bank of America's Michael Hartnett writes that while global earnings have declined and manufacturing activity around the world has slowed this year, we're a long way from levels that would get us thinking about a recession.
So far, global earnings are down 9.6% peak-to-trough, but in Hartnett's view a 15% decline is needed for a "true recession-shock" to earnings.
Global manufacturing PMIs are even further away from recession-type levels.
This year global PMI — or purchasing managers index — is down 3.4% over the prior year, but still hanging in around the 50-52 range, indicating expansion in global manufacturing and nowhere near the 15% decline Hartnett thinks would more seriously indicate a recession.
And so things might not be good, but a recession? Not that close.
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BOFa is fishing for another QE - they could not care less of traders. They are defending FED in order to be first in line of QE4
USD: Risk Aversion Weights; What's Next? - Credit Agricole
The USD has been under pressure of late, mainly on the back of falling expectations regarding the Fed being close to consider higher rates anytime soon. This is due to both intact uncertainty as related to global growth conditions and intensifying downside risks to price developments.
In that respect it must be noted that inflation expectations, as measured by 5Y forward breakeven rates, have been falling towards multi-month lows of late, irrespective of constructive domestic conditions and the weaker greenback.
This in turn may be taken as a signal of domestic conditions not being constructive enough in order to balance out external factors such as weak commodity price developments, dampening the impact on price developments.
However, we stick to the view that the Fed will regard weaker price developments as transitory and that the central bank remains on track to considering higher rates in October.
Accordingly we anticipate only limited USD downside risk from current levels.
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EUR/USD: Two Conflicting Drivers - Credit Agricole
The EUR/USD’s recent path seems to reflect the impact of two conflicting drivers – the relative policy outlook and risk appetite. Whereas the EUR was supported by risk aversion during the latest bout of China-induced market turmoil, it became more sensitive to changes in the EUR/USD rate spread yet again
Given the growing focus on policy divergence, investors will pay particular attention to the release of the flash HICP estimate for September. Indeed, Draghi has indicated that, while the Governing Council has not yet made up its mind about QE2, renewed inflation deceleration in the Eurozone could quickly change the balance of risk in favour of more easing. Needless to say, the EUR is still seen as one of the key levers to achieving the ECB’s inflation target.
Given the growing sensitivity of EUR/USD to the relative policy outlook, evidence of inflation weakness this week could push it closer to recent lows.
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They don't care about inflation : lack of inflation is just a cause to get free money stuffed into their pockets using QE as a cover
Traders Don't Be Surprised, The EUR Will Rise - HSBC
HSBC is out with what is probably one of the strongest contrarian views we have seen so far on the EUR. In its weekly note to clients, HSBC makes the case not only for a stronger EUR but for a weaker USD as well. The following are the key points in HSBC's argument along with its new EUR/USD forecasts, and a detailed diagram on what will lead to EUR strength.
1- QE and the EUR. "The ECB was the main architect of the fall in the EUR in the second half of 2014, and the central bank still appears committed to curbing what it sees as excessive appreciation of the single currency...In our eyes, levels above 1.15 on EUR-USD are enough to prompt some soft push-back from the ECB, and the recent behaviour suggests that a move heading above 1.20 could trigger real concern at the ECB," HSBC argues.
2- The 60 billion EUR question: can the ECB repeat the trick? "The ECB is likely to become more and more constrained in its QE activity. In any circumstance, it will need to use its limited ammunition very carefully in the future. We believe that the ECB’s lack of policy options alongside our outlook for a weaker USD after the Fed starts hiking rates will see EUR-USD move higher," HSBC adds.
3- Despite the Fed, USD weakness ahead. "It is not just the ECB angle that points to a stronger EUR. We believe there is excessive optimism on the USD, especially against G10 currencies. Having seen the end of the USD bull-run against developed market currencies, we could now be on the cusp of a weakening USD trend. The upcoming US tightening cycle could be unconventionally brief, confounding USD bulls relying on the US Federal Reserve to deliver a more aggressive series of rate hikes than is currently priced in," HSBC argues.
4- USD weakness + ECB’s limited firepower = stronger EUR. "We have two moving parts when it comes to EUR-USD. On the one side sits the Fed and on the other the ECB. The Fed is seen as the hawk while the ECB is the dove. Now we believe the reverse to be true: that the Fed will not deliver to their hawkish dots and that the rate cycle – if it ever gets going – will be shallow and short. The ECB on the other side will not be able to be super dovish. Thus as the market adjusts to a not so hawkish Fed and a constrained ECB the EUR will adjust upwards.
5- New EUR/USD Forecasts: HSBC is now looking for EUR/USD to hit 1.14 by year-end, and 1.20 by end 2016.
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Sell Rallies In EUR/USD - ANZ
"In the near term, the FOMC’s decision not to raise interest rates has raised concerns about the severity of the global environment. If such fears materialise, then investor risk appetite is likely to fall and that could easily spark some further unwinding of short positions in funding currencies, having the effect of pushing the euro higher.
The euro area’s balance of payments position could also support that – the current account surplus was 2.6% of GDP in the 12 months to July, which was up from 1.8% for the equivalent period last year. The improved euro area fiscal position (deficit estimated at 2.3% of GDP this year) is also positive for the euro. In an environment of heightened risk reduction, it is conceivable that the euro could benefit and residual long USD positions get squeezed.
SELL RALLIES IN EUR/USD. Nevertheless, our central case view remains one of modest euro depreciation from here. The domestic environment in the US continues to impress, and we are told that the FOMC’s decision to keep interest rates on hold in September was a close call. The inflation environment in the euro area remains poor and the policy is firmly fixed on trying to counteract that.
The ECB is also likely to try and offset any unwarranted EUR appreciation by strengthening its forward guidance and possibly easing policy further. Expectations of that may help cap rallies in the euro. It is worth remembering that the ECB’s fragile inflation forecast is based on the assumption of an average exchange rate of 1.12 vs the USD. Were it to appreciate sustainably, that would undermine their efforts to restore price stability."
Dylan Eades, Brian Martin - ANZ
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Correlations show euro should be higher - Citi
In a note to clients today, CitiFX highlights two charts are causing concern on their EUR/USD view:
1- The ratio of DAX/SPX suggests EUR/USD should be closer to 1.21 (over 7% higher).
2- 10y EURUSD swap spreads suggests EUR/USD 1.21 as well.
"When both equities and swaps point to a higher EURUSD, we pay attention - regardless of where we think EURUSD is headed from a macro perspective," Citi argues.
"Fundamentally, our year-end view remains 1.05...Leaving the Q4 view aside, the charts below are pretty convincing - and present a strong challenge to the macro framework," Citi adds.
This, according to Citi, raises two questions surface immediately for us: "(1) Why isn't EURUSD higher already (i.e. the correlations have broken down between FX, swaps & equities) and (2) What's the potential here for yet another squeeze (i.e. correlations returning)?," Citi clarifies.
In terms why these correlation have broken, Citi thinks that the ECB is so far the best explanation.
Can the sequeeze return? "The squeeze comes if either seem inevitable - (1) the market stops believing in a policy push-back, or fear of the central bank policy drops away, or (2) systemic shock trumps all & another economic/financial shock as surprising as China over August," Citi answers.
"Looking forward Draghi's speech on Thursday in DC would be the most immediate event risk that decides direction. His balance (hawkish/dovish/neutral) is key for EURUSD above 1.15 or below 1.10. Until then, we are cautious that squeezes under low liquidity can come more quickly than anticipated - particularly under EM risk-off," Citi argues.
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