hello,
in the last few days I noticed an increased number of forecasts for EUR / USD formed by the investment banks.
This time, here is the opinion of Barclays. enjoy reading
"The resilience of the EUR is owing to a less-than-credible forward guidance (FRG) framework, a backup in rates that has happened more rapidly than in the US (especially recently) and signs of an improved outlook in the euro area, which have led to a fresh influx of foreign capital flows. These add to other inflows into the euro area such as from euro area banks disposing of foreign assets, as well as investors unwinding/hedging EM risk in the tapering-related EM asset sell-off in summer 2013.
We had argued that the imposition of forward guidance regimes should be negative for the EUR to the extent that the frameworks are able to control front-end rates. The ECB’s inability to achieve this is striking, with correlations between euro area and US rates recoupling only a month after the announcement at the July meeting. Although the euro area’s emergence from recession may have something to do with the steepening in EUR rates, the lion’s share has clearly been driven by the backup in US rates (correlations are 80-90%).
The EUR has been particularly sensitive to these developments: the EUR’s beta to 1y rate spreads is the strongest driver per our FFV model, and the movement in relative interest rates contributes nearly two-thirds of the EUR’s rally since July. What is striking is that other factors such as relative equity returns (which capture improved euro area growth prospects and sentiment versus the US) have not contributed as much to the EUR’s stability (about 20% of its move), even though European equities have moderately outperformed those in the US over the past three months.
However, there is some evidence to suggest that investor flows into the euro area has picked up recently after years of being underweight the region. Flows into Europe ex-UK show a noticeable pickup from early July onwards. Given our overweight view on European equities, we expect these flows to provide some additional support for the currency.
Further, BIS data show that euro area banks continued to sell assets outside of the region into Q1 13. Cross-border lending by euro area banks has dropped $105bn since the end of Q3 13. The largest declines were against developed market countries, with lending into the G10 (exeuro area) falling about $147bn. Inasmuch as these loans are FX hedged, we would expect a disposal of assets to generate an FX flow back into the euro area, adding to the EUR’s resilience.
Finally, the EUR/USD may have received additional support from the unwind of EM carry positions. We were expecting the USD, JPY and CHF to be almost exclusively the currency beneficiaries of the EM carry unwind, but were surprised by the anecdotal evidence suggesting quite a bit of these EM positions were funded in EUR.
Although we do not expect any aggressive policy shifts by the ECB, we expect it to cap any steepening in the rates curve and/or a decline in the liquidity surplus. As such, we see EUR/USD stuck in a range initially (1m forecast: 1.35), potentially weakening at the 3m horizon (3m: 1.32) as the ECB responds to the liquidity tightening with a new LTRO. We still believe monetary policy divergence will favour the USD over the EUR in the medium term, though the pace of depreciation is likely to be relatively slow as the US curve is allowed to steepen only gradually. We expect the weakening trend in EUR/USD to persist (6m forecast: 1.30, 12m: 1.27), with diverging medium-term prospects implying a more aggressive ECB than the Fed."
We had argued that the imposition of forward guidance regimes should be negative for the EUR to the extent that the frameworks are able to control front-end rates. The ECB’s inability to achieve this is striking, with correlations between euro area and US rates recoupling only a month after the announcement at the July meeting. Although the euro area’s emergence from recession may have something to do with the steepening in EUR rates, the lion’s share has clearly been driven by the backup in US rates (correlations are 80-90%).
The EUR has been particularly sensitive to these developments: the EUR’s beta to 1y rate spreads is the strongest driver per our FFV model, and the movement in relative interest rates contributes nearly two-thirds of the EUR’s rally since July. What is striking is that other factors such as relative equity returns (which capture improved euro area growth prospects and sentiment versus the US) have not contributed as much to the EUR’s stability (about 20% of its move), even though European equities have moderately outperformed those in the US over the past three months.
However, there is some evidence to suggest that investor flows into the euro area has picked up recently after years of being underweight the region. Flows into Europe ex-UK show a noticeable pickup from early July onwards. Given our overweight view on European equities, we expect these flows to provide some additional support for the currency.
Further, BIS data show that euro area banks continued to sell assets outside of the region into Q1 13. Cross-border lending by euro area banks has dropped $105bn since the end of Q3 13. The largest declines were against developed market countries, with lending into the G10 (exeuro area) falling about $147bn. Inasmuch as these loans are FX hedged, we would expect a disposal of assets to generate an FX flow back into the euro area, adding to the EUR’s resilience.
Finally, the EUR/USD may have received additional support from the unwind of EM carry positions. We were expecting the USD, JPY and CHF to be almost exclusively the currency beneficiaries of the EM carry unwind, but were surprised by the anecdotal evidence suggesting quite a bit of these EM positions were funded in EUR.
Although we do not expect any aggressive policy shifts by the ECB, we expect it to cap any steepening in the rates curve and/or a decline in the liquidity surplus. As such, we see EUR/USD stuck in a range initially (1m forecast: 1.35), potentially weakening at the 3m horizon (3m: 1.32) as the ECB responds to the liquidity tightening with a new LTRO. We still believe monetary policy divergence will favour the USD over the EUR in the medium term, though the pace of depreciation is likely to be relatively slow as the US curve is allowed to steepen only gradually. We expect the weakening trend in EUR/USD to persist (6m forecast: 1.30, 12m: 1.27), with diverging medium-term prospects implying a more aggressive ECB than the Fed."
Chris Walker & Aroop Chatterjee - Barclays Capital
summarizing recent analysis:
JP Morgan: rather SHORT
Goldman: strong LONG
Barclays: strong SHORT
My opinion: rather SHORT
trade save,
oscarjp
The information contained in this publication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Any opinion offered herein reflects oscarjp-chrimatistikos current judgment and may change without notice. Users acknowledge and agree to the fact that, by its very nature, any investment in shares, stock options and similar and assimilated products is characterised by a certain degree of uncertainty and that, consequently, any investment of this nature involves risks for which the user is solely responsible and liable.
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