8 Jun 2015
EUR/USD towards parity before year-end – BAML
FXStreet (Barcelona) - Strategists at BofA-Merrill Lynch, explain the reasons behind their forecast for EUR/USD to head towards parity before year-end.
Key Quotes
“Volatility in Bund yields has been the main driver of EUR/USD volatility lately. We think the recent Bund sell-off is overdone and expect that, at current levels, demand from some real money investors such as bank treasuries and life and pensions to revive. Moreover, net issuance is turning negative in June and will reach -€120bn in July. In our view, EUR/USD will follow Bund yields lower over the next two months.”
“The Greek crisis is coming to a head. Our view is that things will likely get worse before they get better. Moreover, notwithstanding the possibility that a Greek exit may be positive for the EUR in the long term, we see a potential messy and protracted divorce as being negative for the EUR in the short term.”
“The Ukraine crisis is escalating once again, amid a surge in violence in eastern Ukraine last week that prompted Prime Minister Poroshenko to warn of a “full-scale” Russian invasion. German exports to Russia are already down 30% in 1Q.”
“The better-than-expected May nonfarm payroll data, coupled with strong auto sales and accelerating housing market, has led our US economic team to maintain their view of a September Fed hike.”
“We are targeting parity before year-end.”
“Risk. The biggest risk to our bearish EUR/USD view is if Eurozone inflation continues to surprise to the upside. Our European economics team believes the sharp increase in core CPI in May was due to a combination of seasonal and technical factors. They also expect the passthrough from euro depreciation into inflation to be modest as limited pricing power forces importers to absorb increased costs.”
Key Quotes
“Volatility in Bund yields has been the main driver of EUR/USD volatility lately. We think the recent Bund sell-off is overdone and expect that, at current levels, demand from some real money investors such as bank treasuries and life and pensions to revive. Moreover, net issuance is turning negative in June and will reach -€120bn in July. In our view, EUR/USD will follow Bund yields lower over the next two months.”
“The Greek crisis is coming to a head. Our view is that things will likely get worse before they get better. Moreover, notwithstanding the possibility that a Greek exit may be positive for the EUR in the long term, we see a potential messy and protracted divorce as being negative for the EUR in the short term.”
“The Ukraine crisis is escalating once again, amid a surge in violence in eastern Ukraine last week that prompted Prime Minister Poroshenko to warn of a “full-scale” Russian invasion. German exports to Russia are already down 30% in 1Q.”
“The better-than-expected May nonfarm payroll data, coupled with strong auto sales and accelerating housing market, has led our US economic team to maintain their view of a September Fed hike.”
“We are targeting parity before year-end.”
“Risk. The biggest risk to our bearish EUR/USD view is if Eurozone inflation continues to surprise to the upside. Our European economics team believes the sharp increase in core CPI in May was due to a combination of seasonal and technical factors. They also expect the passthrough from euro depreciation into inflation to be modest as limited pricing power forces importers to absorb increased costs.”