5 Nov 2015
Weaker euro is not just about central bank divergence – Deutsche Bank
FXStreet (Delhi) – George Saravelos, Strategist at Deutsche Bank, suggests that the Central bank divergence is an important driver of EUR/USD, but this is not the only part of the story.
Key Quotes
“Another is the emergence of the euro as the world’s preeminent “risk” currency, driven by increased euro funding usage as well as persistently strong European capital outflows (a term we have called Euroglut).”
“The reason this matters is that the euro has much more scope to weaken when equities rally rather than sell-off. Thinking through to year-end, there are good reasons to believe that the risk-environment can stay positive. First, yesterday’s composite PMI surveys – the single best indicator of global growth momentum - bounced across almost all countries, invalidating recent downside global growth fears. Second, global data have very strong year-end seasonals, with the average of G10 data surprises rising every year over the last decade except during the 2008-09 Great Recession. Third, Chinese capital outflows (and the currency) have stabilized, with the delay of the SDR inclusion decision to month-end and the imposition of “macroprudential” measures encouraging continued stability. Fourth, recent capital flow data indicates that inflows into EM are (tentatively) returning.”
“The conclusion from the above is that the risk appetite picture looks reasonable and continued improvement is just as important to our bearish EUR/USD view as the Fed and ECB decisions. On the central bank front, the market is only priced for a -10bps December depo cut and QE duration extension but despite strong European data ECB commentary remains very dovish.”
“We therefore see the risks as skewed towards more, rather than less ECB easing. Fed probabilities are a tougher call, but with the FOMC meeting not due until December 16th, there is plenty of potential for EUR/USD to reach the year’s 1.05 lows and beyond before then.”
Key Quotes
“Another is the emergence of the euro as the world’s preeminent “risk” currency, driven by increased euro funding usage as well as persistently strong European capital outflows (a term we have called Euroglut).”
“The reason this matters is that the euro has much more scope to weaken when equities rally rather than sell-off. Thinking through to year-end, there are good reasons to believe that the risk-environment can stay positive. First, yesterday’s composite PMI surveys – the single best indicator of global growth momentum - bounced across almost all countries, invalidating recent downside global growth fears. Second, global data have very strong year-end seasonals, with the average of G10 data surprises rising every year over the last decade except during the 2008-09 Great Recession. Third, Chinese capital outflows (and the currency) have stabilized, with the delay of the SDR inclusion decision to month-end and the imposition of “macroprudential” measures encouraging continued stability. Fourth, recent capital flow data indicates that inflows into EM are (tentatively) returning.”
“The conclusion from the above is that the risk appetite picture looks reasonable and continued improvement is just as important to our bearish EUR/USD view as the Fed and ECB decisions. On the central bank front, the market is only priced for a -10bps December depo cut and QE duration extension but despite strong European data ECB commentary remains very dovish.”
“We therefore see the risks as skewed towards more, rather than less ECB easing. Fed probabilities are a tougher call, but with the FOMC meeting not due until December 16th, there is plenty of potential for EUR/USD to reach the year’s 1.05 lows and beyond before then.”