EUR/USD certainly enjoyed the global turmoil and rallied hard. But that’s not the only reason.
The team at Nomura analyzes the situation and looks at what lies ahead for the pair:
Here is their view, courtesy of eFXnews:
In a special note to clients, Nomura outlines the key reasons behind the ongoing rally in EUR/USD, projecting the path of the pair over the coming months.
1- Nomura has now formalized a new central case that the Fed delays in September after the FOMC sent a clear signal about that in the minutes on Wednesday and that the market will start to question lift-off in December.
2- “Portfolio outflows from the eurozone, which peaked around April, have since moderated.This is a function of the normalization of yield levels we have observed, driven by the spike in the Bund yield, but fairly broad based. For example, the debt-weighted yield on eurozone 10yr bonds averaged 0.85% in April, and is now 1.33%,” Nomura clarifies.
3-“Global market dynamics have turned decisively bearish as we have moved into August. Although risk sentiment can be very erratic, we are concerned that the current bear trend could last a while. It is not tied to any specific political tensions (such as the Greek debacle in June/July). Instead, it seems to be linked to broad-based global growth concerns, and a correction in asset prices after a multi-year, QE-driven bull run. From this perspective, this could be a more durable form of risk aversion,” Nomura adds.
“We think these forces point to weaker portfolio outflows, which may even put the eurozone’s large current account surplus back in fashion as a driver of FX, to some degree,” Nomura argues.
Nomura thinks the combination of these forces suggests that EURUSD is most likely to trade around 1.13 by the end of Q3. Meanwhile, if the Fed is able to go in December, EURUSD should be able to trade lower again, towards 1.10.
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