EUR/USD is sliding to the downside but it may recover, says the team at MS:
Here is their view, courtesy of eFXnews:
We expect EUR to appreciate moderately this year but then depreciate significantly in 2017
EUR fits into the category of currencies driven increasingly by real over nominal yield differentials. Falling inflation expectations as a result of below-par DM growth coupled with the inability of nominal bond yields to fall at the same pace should push real yields higher in the eurozone. EURUSD should move higher as real EMU rates rise faster than real US rates. Sure, EMU economic weakness from Brexit is expected to keep the ECB accommodative for longer. However, without rate cuts deeper than the market’s current pricing of 60% probability of a 10bp cut in 2016 and a 14bp cut in 2017, EUR is going to find it difficult to weaken.Enlarging the QE program may not translate into EUR weakness because relatively flat yield curves in the eurozone mean that QE is less effective at bringing down long-end bond yields as much as in the past.
Current account dynamics:
The eurozone’s 3% of GDP current account surplus means that the currency should remain supported unless EUR is pushed back out into long-term investment abroad. Balance sheet constraints on struggling EMU banks have reduced the incentive to lend abroad. In fact,eurozone banks have been repatriating foreign lending activities over recent months,keeping EUR from falling aggressively despite increased political concerns following the Brexit vote.Weakness in European equities should further support the currency view as lower regional risk appetite should reduce the incentive to add to investments outside of the eurozone.
Political risks:
The political risks that could emerge in 2017 area big reason why we expect EUR to weaken. October 2016 already brings a slew of events such as the Italian constitutional referendum, Hungarian referendum on immigration and a re-run of the Austrian national election. In 2017, we will have general elections in France and Germany where markets could debate the future of the single currency should there be an increased proportion of votes won by populist parties.
For lots more FX trades from major banks, sign up to eFXplus
By signing up to eFXplus via the link above, you are directly supporting Forex Crunch.
Share
