21 Apr 2016
EUR/USD: Anticipating a period of stability – Deutsche Bank
George Saravelos, Strategist at Deutsche Bank, suggests that following last month’s ECB and Fed meetings, we pushed our EUR/USD parity forecast out to the end of the year, anticipating a period of stability in coming months.
Key Quotes
“We see small upside risks to the euro following the ECB press conference today but little to change our medium-term outlook.
First, despite recent Fed dovishness, the real rate differential between Europe and the US is not signaling a large divergence in FX versus monetary policy expectations. EUR/USD “fair value” is a little above 1.15 on rate differentials, suggesting small upside risks post a “no news” ECB day. To change our medium-term euro view, we would need to agree with current market pricing, that the Fed is on hold this year. We don’t: one or two hikes seems more reasonable.
Second, the underlying flow picture – our Euroglut thesis – is not changing either. Updated portfolio flow data released this week show that the relentless fixed income outflows from Europe continue at full speed, currently running at an annualized half a trillion euros. There is little to suggest that hedging behaviour on these flows should be changing either: 1-yr euro cross-currency basis is reasonably stable, in contrast to Japan where the cost has more than doubled in recent months.
Finally, we don’t think that the medium-term dollar bull trend is over. The recent dollar correction is not unusual for medium-term cycles. And medium-term tops only happen when the dollar turns into a low-yielding currency. The greenback is currently a mid-yielder – and is still on track for higher, not lower, yield rankings by the end of the year.”
Key Quotes
“We see small upside risks to the euro following the ECB press conference today but little to change our medium-term outlook.
First, despite recent Fed dovishness, the real rate differential between Europe and the US is not signaling a large divergence in FX versus monetary policy expectations. EUR/USD “fair value” is a little above 1.15 on rate differentials, suggesting small upside risks post a “no news” ECB day. To change our medium-term euro view, we would need to agree with current market pricing, that the Fed is on hold this year. We don’t: one or two hikes seems more reasonable.
Second, the underlying flow picture – our Euroglut thesis – is not changing either. Updated portfolio flow data released this week show that the relentless fixed income outflows from Europe continue at full speed, currently running at an annualized half a trillion euros. There is little to suggest that hedging behaviour on these flows should be changing either: 1-yr euro cross-currency basis is reasonably stable, in contrast to Japan where the cost has more than doubled in recent months.
Finally, we don’t think that the medium-term dollar bull trend is over. The recent dollar correction is not unusual for medium-term cycles. And medium-term tops only happen when the dollar turns into a low-yielding currency. The greenback is currently a mid-yielder – and is still on track for higher, not lower, yield rankings by the end of the year.”