EUR/USD Gains Unsustainable say BTMU, but CIBC say they Can Extend a Little Further (2)
A roundup of the most recent notable institutional forecasts concerning the EUR to USD exchange rate made available to our editorial desk.
We seen EUR USD trade back above the 1.12 threshold for the first time since June 24 as UST-Bund spreads continue to compress.
“Having seen JGB yields spike higher we are seeing a similar, albeit smaller reaction in German bund yields. Amidst a near term correction in risk sentiment the combination of spread compression and investors retreating towards currencies with current account surpluses is providing EUR USD impetus,” notes Jeremy Stretch, an analyst with CIBC Markets in London.
When bund yields spiked aggressively higher in Q2 ’15 EUR USD also moved sharply higher.
“While we remain cautious in extrapolating near term moves, for now it seems that amidst a dearth of Eurozone domestic data we could see the current EUR USD uptrend extend,” says Stretch.
Euro-Dollar Strength Forecast to be Limited: Bank of Tokyo Mitsubishi UFJ
The US dollar weakened by 0.6% on a DXY index basis in July with all of that depreciation and some more coming on the final trading day of the month in response to weaker than expected real GDP data for Q2.
Real GDP growth has now been very subdued for three quarters, averaging just 1.0% over that period, adding more uncertainty to the economic outlook.
“However, we expect better growth rates in Q3 and Q4 and for the Federal Reserve to raise the federal funds rate in December,” says a note from Bank of Tokyo Mitsubishi UFJ as quoted by eFXNews.
According to eFXNews, the institutional research provider, the Bank of Tokyo report goes on to tell traders to expect limited EUR/USD upside potential:
“Risks are skewed to the downside for the dollar over the short-term with economic uncertainty reinforced by political uncertainty ahead of the presidential election on 8th November.
“While downside risks are evident we still expect the dollar to be broadly stable as weak growth abroad and central bank easing in response provides support for the dollar. Once the election has passed and the Fed lifts rates as economic and political uncertainties fade, the dollar is set to perform well.
The increased economic and political uncertainty in the US that is set to weigh on the US dollar is likely to result in continued stability for the EUR/USD rate.
There are now perhaps greater upside risks over the short-term given the euro-zone large current account surplus will add to the attraction of the euro in circumstances of increased uncertainty.
“However, any gains for the euro are unlikely to be sustained given eurorelated risks may also intensify. Increasing episodes of terrorism ahead of key elections in France and Germany next year which follow the constitutional reform referendum in Italy in October mean scope for EUR appreciation is limited,” says the report.
Downside in EUR/USD to be Contained: Rabobank
Meanwhile, Piotr Matys, EM FX Strategist at Rabobank in London says there are clues to the outlook to be found in the latest IMM Net Speculators’ Positioning data.
Latest data showed bearish bets against the euro increased to the highest level since January in the week ending July 26.
The EUR net short positions edged higher to 112.6k, up from 99.9k in the previous week.
“Meanwhile, EUR/USD produced yet another frustrating rebound last week rallying from the 1.0952 low to almost 1.12 high. The main reason is broadly softer US dollar with the DXY index plunging sharply on Friday following much weaker than expected US GDP growth reported at just 1.2% y/y in Q2,” says Matys.
Given that the Fed is unlikely to increase interest rates in the coming months, the downside in EUR/USD may prove relatively constrained with Rabobank confirming their 6m forecast set at 1.09 and at 1.07 over 9m.