The euro underperformed its US counterpart in the week gone by - something markets may have to get used to if Deutsche Bank's forecasts on the pair are correct.
The euro to dollar exchange rate ended the week in the red against the US dollar, only the New Zealand dollar, franc and yen put in a worse performance.
Interestingly, the week's best performer against the dollar in G10 was sterling having advanced by 1.25%.
This has not been the best of week's for the shared currency with notable declines also being seen agianst the pound sterling while against the dollar we have seen declines from just below 1.14 registered on Tuesday to the 1.1244 we are seeing now.
And the move lower should ultimately accelerate warns Deutsche Bank who are long-time bears on the pair. Indeed, a few months ago they were forecasting a low of 0.85 for the pair.
Deutsche have conceded this forecast was too agressive, neverthless their assumptions on a weaker euro remain in place:
Firstly, despite recent Fed dovishness, the real rate differential between Europe and the US is not signaling a large divergence in FX versus monetary policy expectations.
"To change our medium-term euro view, we would need to agree with current market pricing, that the Fed is on hold this year. We don’t: one or two hikes seems more reasonable," says a note on the matter from the Deutsche released on Friday the 22nd April.
Second, the underlying flow picture – DB's Euroglut thesis – is not changing either.
Updated portfolio flow data released this week show that the relentless fixed income outflows from Europe continue at full speed, currently running at an annualized half a trillion euros.
"There is little to suggest that hedging behaviour on these flows should be changing either: 1-yr euro cross-currency basis is reasonably stable, in contrast to Japan where the cost has more than doubled in recent months," says the forecast note.
Finally, "we don’t think that the medium-term dollar bull trend is over. The recent dollar correction is not unusual for medium-term cycles. And medium-term tops only happen when the dollar turns into a low-yielding currency. The greenback is currently a mid-yielder – and is still on track for higher, not lower, yield rankings by the end of the year."
A 1:1 exchange rate is forecast by the end of 2017 based on the above pointers.
EUR/USD Undergoes Considerable Turbulance on ECB Thursday
The EUR/USD pair ended Thursday 21st at the same level that it started the day despite covering over 200 points of ground as it rode and dipped in a rollercoaster of price-change, resulting from the meeting and press conference of the European Central Bank (ECB).
Although no actual change in policy was announced the pair gained ground initially in a counter-intuitive mood which mirrors the global trend in currencies breaking in the opposite direction to that expected by the policy stance, as wider global factors muddy the relationship between monetary policy and currencies.
Earlier in the day we witnessed the same thing happen to the Swedish Krone which gained in value despite the Riksbank announcing almost 50bn in extra stimulus, normally a move expected to have an extremely weakening effect on the home currency.
In the case of the EUR/USD it is possible the pair rose after traders read about the continued influence of global factors in dampening growth, as the euro tends to rise when global risk appetite falls.
This is due to its use as a funding currency for investments in riskier assets. When times are good there is lot of euro selling to acquire the assets, however, when risk appetite sours investors sell their assets, buying back the borrowed euros, increasing demand for the currency which rises as a result.
Nevertheless, not all analysts would agree with this interpretation, as TD Securities in a flash note following the meeting argued the paragraph about global factors had been pushed down the list from top spot to third place, and the mention of market volatility due to global drivers was completely removed altogether.
TD argued a tweak in language on growth, instead, may have caused the initial rally, after the ECB removed “moderate” from the characterization of growth, which was interpreted as a possible nod to more optimistic view of the matter, and this may have been the trigger to euro buying which saw the pair rise 60 points following the statement’s release.
Later during the press conference, however, the euro gave up ground, perhaps as a result of a perception that Mario Draghi softened his stance on not allowing any further cuts in interest rates, which when questioned whether he was still of the opinion, morphed into a generalization about the ECB potentially using any of the tools at its disposal in the event that medium term inflation expectations changed substantially.
It is also possible that the statement’s view that low interest rates were expected to remain for a lengthy period may also have had a dampening effect on the euro’s rally as it may have resurrected the spectre of the decades of nill inflation in Japan - a comparison the ECB is fearful many are beginning to make as the years below target stretch out.