20 Jan 2015
EUR/USD trying to stablize ahead of ECB - Scotiabank
FXStreet (Guatemala) - Camilla Sutton, CFA, CMT, Chief FX Strategist at Scotiabank noted that EUR/USD is hovering either side of 1.1600, attempting to stabilize into Thursday ECB meeting.
Key Quotes:
ZEW, economic sentiment, came in well above expectations in both Germany and the Eurozone; however the focus is on ECB policy."
"Expectations for Thursday’s policy decision are a sovereign QE program between €500bn and €1trn (see yesterday’s daily). The combination of the uncertainty and pricing in aggressive policy has already weighed heavily on EUR, which on a year‐to‐date basis is already down 4%. There are several intricacies with the ECB decision; however for markets it is likely to be shear size that matters. Below is our summary:"
"€500bn or below would disappoint markets, and likely force EUR back towards 1.18;"
"Between €500 and €600bn would be seen as fairly neutral and likely keep EUR close to current levels;"
"€600bn or above would be seen as EUR negative and force the currency another leg lower."
"Our base case is a program between €500 and €600bn, which opens the door to a slow trend lower in EUR; however we note the risk around Thursday’s decision are significant."
"Our year‐end forecast is for EUR to close the year at 1.13; which would equate to a fundamentally driven 7% year‐over‐year decline or a 20% decline since its May 2014 high of 1.3993. We see the risks to our forecasts as skewed to the downside."
"EUR at parity with the USD, equates to a 29% fall from the May high, and well within historical return patterns in currencies. However for parity to emerge there are three developments that would need to occur: 1) an aggressive ECB program of +€600bn with a relatively short timeline; 2) a further deterioration in the fundamental, growth and inflation, forecasts for Europe; 3) flows exiting the Eurozone would have to intensify. For now we see a drop in EUR to this level as a risk but it is not our base case."
Key Quotes:
ZEW, economic sentiment, came in well above expectations in both Germany and the Eurozone; however the focus is on ECB policy."
"Expectations for Thursday’s policy decision are a sovereign QE program between €500bn and €1trn (see yesterday’s daily). The combination of the uncertainty and pricing in aggressive policy has already weighed heavily on EUR, which on a year‐to‐date basis is already down 4%. There are several intricacies with the ECB decision; however for markets it is likely to be shear size that matters. Below is our summary:"
"€500bn or below would disappoint markets, and likely force EUR back towards 1.18;"
"Between €500 and €600bn would be seen as fairly neutral and likely keep EUR close to current levels;"
"€600bn or above would be seen as EUR negative and force the currency another leg lower."
"Our base case is a program between €500 and €600bn, which opens the door to a slow trend lower in EUR; however we note the risk around Thursday’s decision are significant."
"Our year‐end forecast is for EUR to close the year at 1.13; which would equate to a fundamentally driven 7% year‐over‐year decline or a 20% decline since its May 2014 high of 1.3993. We see the risks to our forecasts as skewed to the downside."
"EUR at parity with the USD, equates to a 29% fall from the May high, and well within historical return patterns in currencies. However for parity to emerge there are three developments that would need to occur: 1) an aggressive ECB program of +€600bn with a relatively short timeline; 2) a further deterioration in the fundamental, growth and inflation, forecasts for Europe; 3) flows exiting the Eurozone would have to intensify. For now we see a drop in EUR to this level as a risk but it is not our base case."