Euro Dollar Rate Forecasts for 2014-2015 - page 43
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USD: Uptrend Still Intact; Buy Any Dips - Credit Agricole Given that last week’s FOMC minutes made it clear that a hike should be expected in December and as inflation expectations as measured by 5Y forward breakeven rates have been rebounding, irrespective of rising rate expectations, a stronger currency and muted commodity price developments we do not doubt that the Fed will tighten monetary policy in December.
From that angle one should expect the greenback to remain a buy on dips, even if limited room of even further rising monetary policy expectations suggest rising position squaring-related correction risk.
Elsewhere, the USD should be driven still by risk sentiment, especially on the back of a rising expected rate advantage. Considering that equities advanced for most of the last few weeks, one should assume that investors’ US growth expectations have been improving sufficiently in order to compensate for tighter monetary conditions dampening impact on investors’ appetite for risk assets.
In terms of data this week’s focus will be on the second release of Q3 GDP and the Michigan consumer sentiment survey.
EUR/USD To Challenge 1.05 But Caution Warranted - BNPP With the 2-year US treasury yield at new highs above 91bp, rate differentials are continuing to move in the USD’s favour, notes BNP Paribas.
"We expect the dollar to extend gains heading into December, with EURUSD likely to challenge 1.05," BNPP projects.
"However, as we discuss in our weekly we would recommend trimming long USD positions heading into ECB and Fed event risks during that month," BNPP advises.
EUR/USD: In Thrall Of Fed & ECB; 1.05 Is The New Pivot - NAB How much is December Fed rates ‘lift-off’ now in the price of the dollar? How much is intensification of ECB easing in December in the price of the euro? Heightened geopolitical tensions, China and Emerging Market currency risks aside, the Fed and ECB policy implications for the exchange rates are rightly now front and centre of the market’s collective mind.
On the dollar side of the EUR/USD equation, the minutes of the FOMC’s October meeting published last Wednesday make pretty clear that in the absence of a disastrous November US payrolls report or, we’d suggest, a major global equity market meltdown, the Fed will move its funds rate target range up by 25bps following the 17 December FOMC meeting. Though money markets still only ascribe about a 70% probability to December lift-off, it is our contention that FX markets have travelled for much of 2015 with much greater confidence than the rates market that the Fed will be delivering on its conditional promise to raise rates before 2015 is out.
Dollar strength to constrain Fed…and limit dollar strength. If the Fed is to deliver no more than two additional tightenings in 2016, we’d struggle to believe this is going to deliver a materially higher dollar. Indeed, in our latest FX forecasts, that encompass a modest downward adjustment to our EUR forecasts in the next few quarters. we only have the narrow DXY dollar index appreciating by about 1.5% in 2016. Relevant to this view is the somewhat circular argument that the strength of the dollar is in itself likely to represent a significant constraint on the extent of tightening next year.
EUR forecasts tweaked back down. It is partly for the above reasons that we are not overly bearish on the euro here, preferring to consider EUR/USD as more likely to be a 1.00 -1.10 currency rather than our previous characterisation as a 1.05 -1.15 pair. The extent of prevailing short positioning in the euro tempers any enthusiasm for suggesting a fall below parity over the forecast horizon.
We have little doubt that between now and end-2016, we will experience several ‘risk-off episodes’. In the meantime, the euro’s funding currency status is likely to be further enhanced by whatever the ECB announces on 3 December. The 6% fall in EUR/USD since 22 October has, judging from Mr Draghi’ s remarks on 12 November (when EUR/USD was already sub- 1.08) evidently done nothing to dampen his enthusiasm for undertaking further action next months. Draghi contended that “downside economic risks are clearly visible” and that “inflation dynamics have somewhat weakened”.
We look for the ECB to deliver another 10 -15bps reduction in the Deposit rate (from -20bps) as well as increasing the QE quantum from the current €60bn per month. While partially discounted, we still think this will serve to at least validate the recent move lower in the euro. Hence we now see 1.05 as a pivot for EUR/USD in coming months, versus 1.10 previously.
EUR/USD On Course To Break 1.0490 - Morgan Stanley The US yield curve has flattened further this week expanding a trend which is now in place for three months, notes Morgan Stanley.
"The flattened curve suggests that a ‘dovish rate hike’ in December in now well telegraphed, bearing little surprise potential for risky assets," MS adds.
"It is not the Fed that matters for the interpretation of risk and the evolution of USD from here, it is the performance of the Asian and here especially the Chinese economy. Once Asian data improve, signalling a better local investment outlook, repatriation-related USD demand should ease, allowing USD to correct lower and the DM risk rally to widen its wings, affecting EM markets too.
The continued fall in industrial raw materials prices suggests that it is not yet time to bet on stronger Asian economic data releases, keeping us long USD," MS argues.
Turning to the EUR and the ECB, MS notes that the German opposition of further QE as expressed by ECB Lautenschlaeger did not even lead to a slight market reaction as the market understands that hawkish ECB members are in a minority position.
"Draghi, Coeure and Praet run the show, determining the dovish direction of the ECB, keeping EUR under selling pressure.
The previous EURUSD 1.0490 low may work as a magnet for further price activity," MS projects.
JPMorgan cuts Q4 GDP tracker to 2.0% from 2.5% JPMorgan sees slower fourth quarter Economists at JPMorgan said there is "still some lingering downside risk" of a slowdown in consumer spending.
They also said today's durable goods report didn't help the cause as inventories were a touch soft.
5 Reasons To Stay Short EUR/USD - Citi
There are 5 good reasons all round for the EUR to weaken with particular focus on EUR/USD, says CitiFX in a note to clients today.
"Market: Interest rates, particularly at the short end of the curve, in Europe and the US are moving in opposite directions.
Policy: The ECB and the Fed are facing opposite directions. The ECB needs to achieve more with its Q.E., particularly a lower exchange rate as Draghi well knows. The Fed needs to overcome its fears and hike rates so it is not further behind the curve.
Techamentals: European data has not improved enough and inflation is still too low. On the other side, US data is strong.
Trade:The slowdown in the East, particularly China, is a current threat to German activity. Granted that China also needs a weaker currency (or at least not a stronger one) which means the USD should be set to outperform on a wider scale.
Technical:The price action is still similar to that seen in 1998-99 – also a period where the ECB and the Fed were facing opposite directions. The trend lows are not far now and a breach of 1.0458 would be important when seen," Citi argues.
In line with this view, Citi maintains a short EUR/USD position from 1.1110, with a stop at 1.1520, and a target at 1.0450.
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Scope For Deeper ECB Deposit Rate Cut, Stay Short EUR - BNPP BNP Paribas' economists have revised their forecast for the ECB’s 3 December policy meeting and now expect a 20bp deposit rate cut (10bp previously).
"This is in addition to a EUR 10bn increase in the monthly rate run of asset purchases and a 12m extension of the programme to September 2017. Our economists highlight that recent reports of a two-tier application of the negative deposit rate suggest a bigger cut than before is being considered.
The benefit of a two tiered system is that it would likely have a similar depreciation impact on the EUR compared to a system where the deposit rate cut is applied to all excess liquidity, while penalising banks by less. Interest rate markets are currently pricing in a 15bp deposit rate cut," BNPP projects.
Accordingly BNPP expects the EUR to remain under pressure as expectations for ECB action continue to build, particularly given that short EUR positioning remains light as signalled by BNPP FX positioning analysis.
BNPP expects EUR/USD to reach parity by Q3 next year.
Euro Heading For Parity With Dollar Analysts at Goldman Sachs (N:GS) believe the euro could be heading for parity with the dollar. The euro dropped below $1.06 on Thursday, following an exclusive report by Reuters that claimed the European Central Bank (ECB) had been considering a variety of options before the next ECB meeting.
The ECB is expected to decide at the meeting whether to expand its current program of quantitative easing. The bank could also potentially cut interest rates further. "They expect EUR/US$ to go to 0.95 over the next 12-months but this level could be reached sooner," said an outlook from Goldman. "Until the ECB meeting they expect 1.05 and parity by year-end."
One of the options the ECB has been considering, Reuters claimed, was a two-tier bank charge on those who seek to keep their money with the ECB. This, the FT reports, would help alleviate major charges for commercial banks.
A source speaking to Reuters voiced their concerns about the eurozone's near-stagnation, and the need for action at the ECB meeting. "We have deflation, so you have to do something," said the source. But what the outcome will be after a few years is uncertain, the source explained.
On the other side of the pond, the Federal Reserve is expected to raise interest rates. The ECB released a stability review on Wednesday that pointed to both the lack of eurozone growth and the impending rate hike were "of particular concern" to the eurozone's stability.
The question is whether surprises have already been priced into the euro ahead of the ECB meeting. "The market is short of euros and is braced for a negative surprise from the ECB meeting," said Kit Juckes at Soc Gen to the Financial Times. "If you've priced-in a surprise, how can you be surprised?"
The Case For Staying Core Short EUR/USD - ANZ "The expectation of ECB policy easing has obviously been positive for euro area fixed income markets. Yields on short-dated notes are at record lows and the medium to long end of the market has been very well supported. The relationship between the German yield curve (10yr vs repo rate) and EUR/USD is powerful as Figure 4 shows. As the curve has flattened, EUR/USD has tended to weaken. In part that reflects portfolio diversification out of low yielding euro area assets.
Until these key relationships show signs of reversing, EUR/USD is likely to remain under downward pressure. EUR/USD has spent much of this year a 1.05-1.15 trading range, largely because the anticipated timing of US interest rate hikes was frustrated by various events (i.e. Chinese equity market volatility, polar vortex). The level of the dollar has also been a concern for policy makers as it has acted as a drag on net exports and output, especially given weakness in overseas demand.
The recent strength of the dollar is something that the FOMC is cognisant of and how the dollar responds to US interest rate rises will be important for future policy considerations. Certainly the pace of appreciation has slowed which the FOMC may welcome. The response in equity markets to a Fed hike will also be important. History tells us that the dollar does not always initially respond well to US rate increases, so it will be critical to watch how the dollar trades in December in addressing its mediumterm direction throughout 2016.
We have not had a situation before where euro area interest rates are negative and falling and QE is expanding at a time when the Fed hike. For now, equities are holding in and the VIX is well behaved.
In that environment the dollar is continuing to stay firm and we recommend staying core short EUR/USD."
Brian Martin - ANZ
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