EUR/USD: Anticipating a Period of Stability – Deutsche Bank

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.”