Bank of America Merrill Lynch have revised their forecast for EUR/USD from 0.95 previously to 1.00; and from 120.00 for the USD/JPY to 110.00.
At the end of 2015 analysts were almost universally bullish the dollar, and the running joke was, “even the bears are bullish”.
In a little over two months, however, that has all changed, and now there is barely a bull still standing.
Bank of America – who had forecast that EUR/USD would cross parity and fall to 0.95 – released a note today in which they have revised up their forecasts, now expecting the pair to fall only to 1.00.
“On the back of our economists change to 2 from 3 Fed hikes this year, the addition of a significant risk episode of US QE and our equity strategists revised forecasts, we now expect: EURUSD to end the year at 1.00.” The bank said.
They also substantially revised down their outlook for USD/JPY, now expecting a drop to 110.00 from a previous forecast of 120.00.
“This year feels different,” they remark, “investors are dealing with multiple shocks: RMB (Renminbi) weakness early in the year and accelerating loss of PBOC reserves; the negative response of equities to the sharp drop in oil prices; the sell-off in credit markets; the further sell-off in EM; the sell-off in European banks; a toxic US data mix, with manufacturing in recession but wages rising; and Eurozone data losing momentum.
“On top of this central bank efficacy is being called to the question: JPY and EUR are stronger despite recent easing by the ECB and BOJ--and more ECB easing ahead.”
Looking ahead, BofA sees risks, “for further changes to our projections in the same direction.”
The BofA note characterizes the US economy as somewhere between a ‘rock and a hard place’:
“At this point, deteriorating US data can make things worse, while a turnaround would hinge on developments beyond the US - China, oil and EM in particular.
“Better US data while calming recessionary fears may stoke the ripple effects of a rising USD again, such as by triggering more capital outflow from China.”
They go onto quote revisions by their U.S analysts which are even more bearish for the dollar:
“Indeed, in the risk scenario that our US economists are considering, we would expect EUR/USD above 1.15, USD/JPY at 100 and US 10y at 1.4%.”
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