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EUR/USD certainly bounced from the lows, mostly due to the Donald. However, the team at Deutsche Bank still lays out a path for EUR/USD way below parity:

Here is their view, courtesy of eFXnews:

We expect the dollar to continue to strengthen over 2017  – corporate tax reform; potential hawkish Fed appointments; fiscal stimulus; the dollar’s status as a high-yielder all favour continued gains throughout the year.

Dollar cycle still has juice. The USD is hardly stretched. Compared to a more than 10%y/y appreciation last January the broad-trade weighted dollar is only 2% higher. More generally, looking at previous cycles the dollar is perfectly tracking moves in terms of pace and duration. All previous dollar cycles have lasted at least six years with 30% moves. Given that the broad dollar troughed in 2011 there is at least one more year to go (chart 4).

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The Draghi trade is over. The ECB surprised in December by tapering but it is not clear this is bullish for the euro. First, the prospect of a sell-off in European fixed income hardly makes European bonds an attractive investment. Second, the correlation between peripheral spreads and EUR/USD has flipped back to negative. During “whatever it takes” more QE and narrowing yields were associated with a weaker euro. The relationship has now flipped because less QE may be associated with higher redenomination risk and a lower euro.More generally, there is an inverse relationship between higher volatility in the German bund and foreign portfolio inflows: when markets become volatile foreigners shy away from Europeans assets. With French, German, Dutch and likely Italian elections all due this year, the market reaction to a negative political surprise will be very asymmetric for EUR/USD.

Valuations and European basic balance  Our model of the European basic balance suggests EUR/USD “fair value” is already below 1.00 given record portfolio outflows that are far larger than the current account surplus. EUR/USD valuations are not yet extreme, with typical over/under-shoots being around 30% or 85cents for EUR/USD.

Sell EUR/USD targeting at least 95cents. We are bearish for the year and we see risks to our 95cent forecast as skewed to the downside.

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