'Party On To Parity': 6 Reasons To Sell EUR/USD - Deutsche Bank
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In a strategy note today, Deutsche Bank advises clients to sell EUR/USD through 2016 arguing that this should be another great year for the greenback which is poised to be a high-yielder by the end of the year. The following are the main points in DB's rationale behind this call along with its target for this structural short EUR/USD trade.
1- Dollar a high-yielder soon: "A striking pattern of previous Fed hiking cycles is that the dollar has weakened following the first FOMC rate increase. The most likely reason is that US yields have ranked in the bottom-3 or below at the start of all major Fed hiking cycles since the 1980s. Low-yielding status is historically associated with significant dollar depreciation, even as rate differentials have widened in favour of the USD as the rate cycle unfolded. This Fed cycle is unique because the dollar is already and remarkably a mid-yielder compared to the rest of the world: US short-end rates are currently higher than half of G10 FX, and assuming current forwards are realized (2 Fed hikes this year) the USD will become a full-fledged high-yielder by the end of the year. A highyielding dollar leads to significant dollar outperformance based on past experience, making the ranking of US yields an important dollar supportive factor in 2016 (chart 1)," DB argues.
2- Risks skewed toward better US data. "Another unique part of the current Fed hiking cycle is that it has started at a time of disappointing US data releases. The last year has seen the longest run of uninterrupted negative US data surprises going all the way back to the early 2000s (chart 2). Similarly, the number of economists expecting 3%+ growth this year has dropped to a new post-crisis low according to the Philly Fed survey of professional forecasters. The odds are therefore skewed the other way. Even if it will only take two Fed hikes to make the dollar a high-yielder, there are upside risks to both growth expectations and the number of Fed hikes that are priced in," DB adds.
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