EUR/USD: 2 Channels For Outflows & 2 Factors To Define A Bottom
eFXnews | Mar 18, 2015 02:10AM ET
ECB QE fuels EUR outflows via two channels:
− The combination of rising excess liquidity and negative deposit rates in the eurozone is driving investors towards riskier assets in a search for yield. This is EUR negative through two channels.
1. We expect the search for yield to include non-EUR assets and thus drive EUR selling.
2. We expect European equity outperformance to lead investors to hedge (at least part of) their returns and thus drive EUR selling. −
Speculative EUR shorts have risen significantly since Q4 as has the level of net commercial EUR positioning. The latter is a hint that foreigners are now hedging EUR income/assets on a larger scale than in ‘normal’ times.
Two factors to define the bottom for EUR/USD
1. Eurozone inflation: while euro-zone core inflation is likely to fall further, our forecasts suggest that headline inflation stands to see a more a more significant upturn than the markets expect at present. When this is seen, probably during the autumn, EUR downside should fade.
2. Fed policy normalisation: on the one hand, we think the market is currently pricing too little Fed tightening (implying more USD strength near term); on the other hand, we think the Fed will eventually go slower on hikes than the market will be pricing at the start of the cycle.
Forecast: 1.03 (1M), 1.01 (3M), 0.99 (6M), 1.08 (12M).
Conclusion. We expect a soft EUR/USD over 3-6M, as the effects of ECB QE and the warm-up to Fed policy normalisation continue to weigh. However, the EUR weakness now playing out and a lower level of oil prices and improved credit conditions should pave the way for the ECB to become less dovish earlier than the market expects. Coupled with our view that a repricing of the Fed will happen mainly ahead of a first hike over the summer, the potential for upside to US rates is limited beyond 6M. As the sell-off in the cross has been more dramatic than previously imagined and the QE effect more EUR negative up front, we have adjusted our forecasts but maintained the same profile. We see the cross below parity in 6M before moving higher on 6-12 months.
Get The News You Want
Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.