Credit Agricole about 'A Referendum On EUR'

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Press review

Sergey Golubev, 2015.06.30 07:32

Bank of America Merrill Lynch for EURUSD: Monetary Policies Vs Greece (based on efxnews article)

FED, ECB, Greece:

"The Greek Referendum will drive headlines for the near-term. We believe that divergence of monetary policies is a more powerful EUR driver than Greek risks. In this context, the timing of the first Fed rate hike (September is our call) and the ECB’s tone (the market misread the ECB’s message to get used to volatility) are more important for the euro than Greek headlines. Whilst Greek headlines and deadlines are clearly urgent, and the market implications in our view both important and not priced in the short-run, ultimately the evolution of monetary policy is in our mind more important," BofA argues.

"We remain bearish EUR/USD, but the uncertainty around the Fed is not bolstering our conviction levels. The euro’s reaction to Greek headlines has been puzzling, sometimes weakening in response to positive headlines for a deal. In part, this is because the USD is oversold. It can also be that the market does not believe that a deal will fully address Grexit risks, which in turn suggests that the ECB is likely to keep QE to be able to address periphery risks and push against a rates sell-off. This could explain the negative correlation between European equities and the Euro recently. Our view remains that tail risks in Greece are negative for the Euro," BofA adds.

Forecasts:

"We have marked-to market our Q3 EUR/USD projection, but keep our end-year projection to 1.00. This assumes that US data will improve in H2, the Fed will start hiking rates in September, the ECB will push against the recent sell-off in rates, inflation will remain below the ECB’s target path, and the market will start expecting the ECB to continue with QE after September 2016," BofA projects.

"At the same time, we expect the Fed to push against any strengthening of the USD that goes beyond what data would justify. We do not expect Grexit in our baseline, but believe that Greek risks will continue weighing on the Euro, with Grexit risks increasing as long as Greece remains in a grey zone," BofA adds.