19 AUG 2013 01:09 EDT
By eFXnews.com
Focus of the day:
"Although most analysts – ourselves included – expect EUR-USD to decline, the euro’s strength continues. Where is the widely expected euro weakness and should not the mere expectation of depreciation send the euro lower in an efficient market? We argue that the factors which have recently supported EUR-USD are temporary. Over time they will cease to exist and EUR-USD is, in our view, likely to decline over the medium-term.
The market doubts the “forward guidance” of the ECB: One reason for the recent strength of EUR-USD is the positive surprises coming from the economic data front in the euro zone. Although US data have for the most part also come in above expectations, the euro zone has clearly outperformed the USA as regards positive surprises, especially from mid-July onwards.
… and the tapering trajectory of the Fed remains uncertain: At the same time, many market participants seem to doubt whether the Federal Reserve is indeed set to reduce (taper) its bond purchases any time soon. In mid-June, the Fed firmed up its strategy for pulling back from its bond-buying programme and announced a time schedule for the tapering process.
Sooner or later, the Fed will taper: Nonetheless, we are firmly convinced that the Fed will indeed start to scale back its bond purchases by year-end. One argument supporting our view is that the negative impact of the restrictive fiscal measures, which were implemented at the beginning of the year, is already beginning to fade. Hence, the US economy looks set to gather considerable momentum in the second half of the year.
… and the ECB will keep interest rates at ultra-low levels for a long time to come: Whilst the Fed is set to scale back monetary accommodation in the months ahead, the same is not to be expected of the ECB. Despite the euro zone’s turnaround in the second quarter and increasing signals of hope from the periphery, the “forward guidance“ of the ECB continues to be credible, in our opinion.
Positioning standing in the way of a smooth downward movement of EUR-USD: Whilst there are good reasons for EUR-USD to weaken, this is unlikely to materialise unless the market environment allows for such a movement. As market consensus expects EUR-USD to weaken, price-sensitive market participants keep piling up EUR short positions from time to time. However, as long as there are doubts about the arguments for a weaker EUR-USD, speculative market participants will likely be unwilling to hold excessive EUR short positions. In other words: Sending a EUR-USD bearish forecast to Bloomberg is one thing, large-scale betting on it is another.
Market participants who patiently wait for the fundamentals to play out ought to be rewarded in the end. Even if we now expect the beginning of the downward movement of EURUSD a little later, we stick to our view that EUR-USD will drop below 1.30 by year-end. By the middle of next year, we expect to see levels in the mid-1.20s area."
Ulrich Leuchtmann, Commerzbank
"Although most analysts – ourselves included – expect EUR-USD to decline, the euro’s strength continues. Where is the widely expected euro weakness and should not the mere expectation of depreciation send the euro lower in an efficient market? We argue that the factors which have recently supported EUR-USD are temporary. Over time they will cease to exist and EUR-USD is, in our view, likely to decline over the medium-term.
The market doubts the “forward guidance” of the ECB: One reason for the recent strength of EUR-USD is the positive surprises coming from the economic data front in the euro zone. Although US data have for the most part also come in above expectations, the euro zone has clearly outperformed the USA as regards positive surprises, especially from mid-July onwards.
… and the tapering trajectory of the Fed remains uncertain: At the same time, many market participants seem to doubt whether the Federal Reserve is indeed set to reduce (taper) its bond purchases any time soon. In mid-June, the Fed firmed up its strategy for pulling back from its bond-buying programme and announced a time schedule for the tapering process.
Sooner or later, the Fed will taper: Nonetheless, we are firmly convinced that the Fed will indeed start to scale back its bond purchases by year-end. One argument supporting our view is that the negative impact of the restrictive fiscal measures, which were implemented at the beginning of the year, is already beginning to fade. Hence, the US economy looks set to gather considerable momentum in the second half of the year.
… and the ECB will keep interest rates at ultra-low levels for a long time to come: Whilst the Fed is set to scale back monetary accommodation in the months ahead, the same is not to be expected of the ECB. Despite the euro zone’s turnaround in the second quarter and increasing signals of hope from the periphery, the “forward guidance“ of the ECB continues to be credible, in our opinion.
Positioning standing in the way of a smooth downward movement of EUR-USD: Whilst there are good reasons for EUR-USD to weaken, this is unlikely to materialise unless the market environment allows for such a movement. As market consensus expects EUR-USD to weaken, price-sensitive market participants keep piling up EUR short positions from time to time. However, as long as there are doubts about the arguments for a weaker EUR-USD, speculative market participants will likely be unwilling to hold excessive EUR short positions. In other words: Sending a EUR-USD bearish forecast to Bloomberg is one thing, large-scale betting on it is another.
Market participants who patiently wait for the fundamentals to play out ought to be rewarded in the end. Even if we now expect the beginning of the downward movement of EURUSD a little later, we stick to our view that EUR-USD will drop below 1.30 by year-end. By the middle of next year, we expect to see levels in the mid-1.20s area."
Ulrich Leuchtmann, Commerzbank
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