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The playing field for the USD may be about to be re-written completely by the Federal Reserve. The big move higher in EUR/USD is probably mainly driven by position squaring and it may therefore have further legs to go, in the opinion of analysts at Nordea.

Key quotes

“Most European asset managers have had a big long USD position via a low hedge ratio on USD assets. If US equities are sold off then we see a net selling of USD spot due to a low or non-existent hedge of the USD component, that’s the position squaring part.”

“The next move could be driven by increased USD hedge ratios, as FX hedge costs are falling off a cliff. It simply becomes much more opportune for FX managers to increase hedge ratios in USD, when the price drops as fast as now.”

“We choose to increase our EUR/USD target for year-end 2020 to 1.17 as a consequence.”

 

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