In a note today, Deutsche Bank outlines 3 reasons behind maintaining its medium term bearish EUR/USD view:
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...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.
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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 (chart 3). 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.
DB targets EUR/USD at parity by year-end.