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3 Dec 2014
EUR/USD: Looking for a 1.18 target by Q4 2015 - JPM
FXStreet (Bali) - John Normand, FX Strategist at JPMorgan, presents the main reasons to understand why the bank's EUR/USD forecast has been extended and steepened slightly to a 1.18 target by Q4 2015.
Key Quotes
"The 2015 euro outlook presents a creative and analytic challenge: is it possible to say anything original or positive about this currency? After the yen, investors and hedgers appear more negative on the euro than on any other nondollar currency for the year ahead, and it’s easy to see why: sub-trend growth and below-target inflation should motivate the greatest US-European policy divide since the ERM Crisis aftermath 20 years ago."
"If it weren't for Europe's record current account surplus, the pull of a cheap equity market and the ECB's gradualist easing approach, the euro might match the yen in terms of our forecast 2015 decline. Having been negative on the currency (but not negative enough) throughout 2014 , we're extending and steepening forecasts slightly to a 1.18 target by Q4 2015. It's true that pure FX positions are near record short ( and that at least €650bn of ECB balance sheet expansion is already discounted.Higher US rates are not in the price, however. Also, Japan's first experience with zero rates ten years ago indicates that underlying bond outflows could persist for years".
"Since the consensus is almost universally bearish, we highlight three sources of upside risk to the euro next year: the Fed’s exit process stalls; Europe equities come back into favour due to valuations, attracting capital inflows; and European growth surprises to the upside, steepening the money market curve. We’re still only lukewarm on eurofunded carry as an alpha strategy, more due to poor fundamentals in most high-yielders (ex MXN, TRY, INR and NOK) than due to reservations about EUR/USD’spath."
Key Quotes
"The 2015 euro outlook presents a creative and analytic challenge: is it possible to say anything original or positive about this currency? After the yen, investors and hedgers appear more negative on the euro than on any other nondollar currency for the year ahead, and it’s easy to see why: sub-trend growth and below-target inflation should motivate the greatest US-European policy divide since the ERM Crisis aftermath 20 years ago."
"If it weren't for Europe's record current account surplus, the pull of a cheap equity market and the ECB's gradualist easing approach, the euro might match the yen in terms of our forecast 2015 decline. Having been negative on the currency (but not negative enough) throughout 2014 , we're extending and steepening forecasts slightly to a 1.18 target by Q4 2015. It's true that pure FX positions are near record short ( and that at least €650bn of ECB balance sheet expansion is already discounted.Higher US rates are not in the price, however. Also, Japan's first experience with zero rates ten years ago indicates that underlying bond outflows could persist for years".
"Since the consensus is almost universally bearish, we highlight three sources of upside risk to the euro next year: the Fed’s exit process stalls; Europe equities come back into favour due to valuations, attracting capital inflows; and European growth surprises to the upside, steepening the money market curve. We’re still only lukewarm on eurofunded carry as an alpha strategy, more due to poor fundamentals in most high-yielders (ex MXN, TRY, INR and NOK) than due to reservations about EUR/USD’spath."