Sell EUR/USD As Sentiment Improves - Credit Agricole
correct, its all about risk sentiments driven by China and slump in oil prices with the start of this new year and euro is getting benefited with risk off mood. and improvement in risk sentiments will surely take euro down.
Buy USD Dips, Sell EUR Rallies - Credit Agricole When it comes to the EUR, we stay of the view that rallies should be sold. This is regardless of cross market volatilities remaining high and mainly due to the notion that monetary policy expectations will become a more important currency driver anew. Even if the ECB is unlikely to consider additional policy measures as soon as this week, we do not exclude that central bank President Draghi will consider a more dovish rhetoric. This is especially true as weak commodity price developments, a stable currency and broadly unchanged growth momentum should have increased downside risks to inflation.
When it comes to the US, we believe that the USD should stay a buy on dips. Although Friday’s weaker than expected retail sales release suggests more muted domestic demand conditions and although this may be reflected in even further falling inflation expectations, there appears to be limited room of further falling Fed rate expectations in the short-term. This is especially true when considering that 12m rate expectations fell considerably over the past few weeks and that Fed’s Dudley more or less reiterated on Friday that the growth outlook has barely changed since December.
The End Of USD Decoupling? - Credit Agricole USD came under broad selling pressure of late following comments by Fed’s Dudley that pointed at growing concerns about the tightening in the US financial conditions on the back of the global market selloff. It didn’t help the fact that the non-manufacturing ISM dropped to its weakest level in three years.
It will be premature to call for the end of the USD decoupling trade, however. Indeed, a closer read of the Fed’s comments suggests that the recent market volatility reinforced its data dependent stance.It did not scupper its tightening cycle altogether, however. If anything, we suspect that further consolidation in the commodity prices on the back of weaker USD should make the Fed more likely, not less likely to hike later this year.
That said, we further note that positive data surprises out of the US would be needed to offset the negative impact of the tighter financial conditions and allow the Fed to resume with its tightening cycle
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Risk sentiment improved further in Asian hours, mainly in reaction to better than expected trade data out of China.In particular better than expected import growth is taken as an indication of more resilient domestic conditions. Even if the latest data remains weak as a whole, it may prove sufficient to make a case of further stabilizing sentiment.
This is especially true as investors’ focus is likely to shift back to central bank events.In that respect next week’s ECB announcement will be key and Draghi may indeed consider a more dovish rhetoric in order to account for increased downside risks to inflation.
In the meantime the focus will be on tomorrow’s December minute’s release, which may highlight that the ECB’s easing bias remains in place. As a result to the above outlined conditions liquidity expectations may rise to the benefit of investors’ demand for risk assets.
At the same time we stay of the view that the EUR should be sold, in particular against the USD. The greenback should stay in demand as the Fed remains on track with tightening monetary policy further. It must be noted that most Fed members’ recent comments suggest limited caution as related to China.
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