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5 Oct 2015
EURUSD upside potential capped – Rabobank
FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that the pace of short-covering in EUR positions has reduced and on the assumption that investors are unlikely to move into long EUR positions in the coming months, we would argue that upside potential for EUR/USD is capped.
Key Quotes
“The weak US September jobs data have driven home the point that the US economy may not be robust enough to absorb a 2015 rate hike. Meanwhile, the enthusiasm for carry trades has been sucked out by risk aversion, meaning that EUR shorts have been reversed.”
“Given speculation that the ECB could increase its asset purchases programme in the not too distant future and that core Eurozone bond yields will remain extremely low, it is likely that investors will be similarly discouraged from holding long EUR positions.”
“That said, disappointing US economic data suggest that downside potential for EUR/USD is also limited near-term. The lack of momentum in US inflation data suggests that the Fed risks making a policy mistake if it were to hike interest rates too soon.”
“The market has taken this risk on board and, following Friday’s poor US labour release the market is now only pricing in a moderate probability of a Fed interest rate hike this year. Strong data between now and then would improve the USD’s prospects.”
“However, investors are facing yet another spate of downward forecasts for global growth and against this backdrop, it seems unlikely that the FOMC would contemplate anything other than a slow pace of interest rate increases over the next couple of years. While this paints a lacklustre outlook for the USD, we are reluctant to remove our expectation that the USD can moderately outperform the EUR in 2016 and we retain our forecast for a move towards EUR/USD1.08 on a 6 mth view.”
Key Quotes
“The weak US September jobs data have driven home the point that the US economy may not be robust enough to absorb a 2015 rate hike. Meanwhile, the enthusiasm for carry trades has been sucked out by risk aversion, meaning that EUR shorts have been reversed.”
“Given speculation that the ECB could increase its asset purchases programme in the not too distant future and that core Eurozone bond yields will remain extremely low, it is likely that investors will be similarly discouraged from holding long EUR positions.”
“That said, disappointing US economic data suggest that downside potential for EUR/USD is also limited near-term. The lack of momentum in US inflation data suggests that the Fed risks making a policy mistake if it were to hike interest rates too soon.”
“The market has taken this risk on board and, following Friday’s poor US labour release the market is now only pricing in a moderate probability of a Fed interest rate hike this year. Strong data between now and then would improve the USD’s prospects.”
“However, investors are facing yet another spate of downward forecasts for global growth and against this backdrop, it seems unlikely that the FOMC would contemplate anything other than a slow pace of interest rate increases over the next couple of years. While this paints a lacklustre outlook for the USD, we are reluctant to remove our expectation that the USD can moderately outperform the EUR in 2016 and we retain our forecast for a move towards EUR/USD1.08 on a 6 mth view.”