Foreign exchange strategists at CIBC Markets have told clients they are entering a bet that seeks to profit on further gains in the Euro against the Dollar.
“We’ve been EUR bulls since late last year, but with today’s break above the 1.1000 mark, we are now officially entering into a strategic EUR/USD long,” says Bipan Rai an analyst with CIBC Markets.
The call comes as the Euro embarks on a broad-based rally against its major rivals with markets betting that the European Central Bank will soon look to withdraw its stimulus programme that has for years weighed the value of the currency down.
Reasons to Buy the Euro
Economic growth has risen to a tempo that justifies a stronger currency argue CIBC.
Eurozone Q1 GDP confirmed that the recovery is broad-based with the five largest economies (Germany, France, Italy, Spain and Netherlands) registering gains for the third straight quarter.
This should feed into a European Central Bank (ECB) policy that is more friendly to the Euro and CIBC say they expect the Bank to alter its forward guidance at its June meeting with the changes to its asset purchase program likely to be announced at the September meeting.
“Additionally, we expect that the ECB will raise its deposit rate before the end of Q1 2018,” says Rai.
However, a lack of wage growth in the Eurozone is a risk to this view, but CIBC expect this to reverse as unemployment continues to trend lower and as growth is likely to be above trend in the coming quarters.
Stabilisation of peripheral spreads (i.e the repayments on the debt of countries such as Greece) continues to support EUR gains led by tightening in Portugal and Greece over the past three months.
Furthermore, external surpluses (trade and current account) point to need for EUR to appreciate to restore long-term equilibrium for several Eurozone economies.
And of course political risks have been dramatically reduced with the victory of Emmanuel Macron in the French Presidential election.
“Still, the Italian election next year merits keeping an eye on (market views will be reflected via BTP-Bund spreads),” Warns Rai.
Details of the Trade
CIBC are going long on EUR/USD entering the market at 1.1065.
They are targeting a move to 1.1800 and would look to exit the trade should the exchange rate fall to 1.0720.
“We are setting our stop below the ‘Macron Gap’ of 1.0738-1.0850,” says Rai.
Furthermore, CIBC remain “strategically long EUR/GBP and targeting a move to the 0.8850 mark”.
Euro Steams Ahead
The Euro is on a tear at present.
"he biggest story today in the forex market today was the strong rally in the euro. The single currency broke above 1.10 and came within a few pips of 1.11. Stronger than expected Eurozone data contributed to the move but the 1.10 break occurred well before the first releases," says Kathy Lien at BK Asset Management.
The source of the newfound confidence in the single currency appears to be a rapid repricing of the chances of a shift in policy at the ECB in coming months.
"The higher EUR seems to be a cause of an anticipation of a shift in the ECB monetary stance," says Petr Krpata at ING in London.
Some are suggesting that the June meeting could see the ECB use language that lays down the conditions for a rise in interest rates and the ending of the quantitative easing programme.
After all, political risks have now greatly diminished thanks to Emmanuel Macron winning the French presidency.
And of course, the Eurozone economy is building a head of steam which suggests there is little justification for the current generous money supply coming from the ECB.