Euro/dollar has been one of the most frustrating currency pairs in the new year, with ranges just becoming tighter and tighter. Where will it go from here? The team at BTMU explains:
Here is their view, courtesy of eFXnews:
The EUR/USD rate did not repeat the sharp declines of January 2015 in 2016 with a more modest 0.6% decline recorded, notes Bank of Tokyo-Mitsubishi UFJ (BTMU).
Such stability, according to BTMU, reflects opposing forces that countered each other.
“Firstly, the upturn in risk aversion due to increased volatility fuelled by renewed concerns over China growth dampened speculation of an FOMC rate increase in March – falling short-term yields in the US undermined the dollar. However, at the ECB meeting in January, President Draghi was explicit in hinting that additional monetary easing may be warranted when the Governing Council next meets on 10th March.
Given the ECB only announced monetary easing in December, the explicit reference to additional easing in March does suggest divisions within the Governing Council over the failure of the ECB to meet its price stability mandate. The minutes of the meeting in December highlighted the divisions with opposition to QE, which appeared more ideological, even if inflation and growth were to slow. Certainly the developments in the crude oil market in January made achieving the 1.0% 2016 inflation forecast more difficult. While President Draghi hinted at more action, the selloff of the euro has been very limited in part due to investors’ scepticism over aggressive action given the apparent divisions within the Governing Council.
Still, the increased presence of negative yields in the euro-zone following the December deposit rate cut is likely to keep the euro under downward pressure. If risk aversion subsides, we would expect further gradual euro depreciation ahead. The net short-term securities flow on a 6mth total basis as of November amounted to an outflow of EUR 51bn, the largest since March. The net flow for long-term securities (debt & equity) was also an outflow with the 6mth sum totalling EUR 196bn. Under favourable market conditions, capital outflows are set to surpass inflows on the current account that remain at a record high.
While the ECB may now ease its policy stance in March, we doubt the action will impact monetary policy divergence expectations and fuel greater euro selling than we currently forecast. A test of parity later this year remains probable,” BTMU argues.
BTMU targets EUR/USD at 1.06 by end of Q1 and at 1.03 at end of Q2.
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