3 Mar 2016
EURUSD: Resilience to ECB easing – BNPP
Research Team at BNP Paribas, thinks that the EURUSD could rally to 1.16 by mid-year, despite their expectations for aggressive ECB easing.
Key Quotes
Our economists are now forecasting unchanged Fed policy in 2016, in line with market pricing, but are more aggressive in their expectations for ECB easing. Despite this, we think EURUSD is likely to rally to 1.16 by mid-year. The key factor underpinning our near-term bullish forecast is that we expect the fragile risk environment preventing the Fed from tightening will also not be conducive to a recycling of the eurozone’s EUR 25bn/month current account surplus.
The combination of (1) ultra-low EUR real yields and (2) the large size of the ECB’s asset purchase programme relative to new Eurozone government bond issuance should theoretically stimulate EUR outflows, as Eurozone investors are crowded out of domestic fixed income markets and search for yield abroad. However, we think these factors will be outweighed by fragility in the risk environment which will not be conducive to portfolio outflows, leaving the EUR supported by its EUR 25bn/month current account surplus. The EUR has outperformed this year as a deteriorating risk environment has left Eurozone domestic investors presumably reluctant to take foreign currency risk by seeking yield overseas. In our view this will likely continue, and we target a move in EURUSD to 1.16 by mid-year.”
Key Quotes
Our economists are now forecasting unchanged Fed policy in 2016, in line with market pricing, but are more aggressive in their expectations for ECB easing. Despite this, we think EURUSD is likely to rally to 1.16 by mid-year. The key factor underpinning our near-term bullish forecast is that we expect the fragile risk environment preventing the Fed from tightening will also not be conducive to a recycling of the eurozone’s EUR 25bn/month current account surplus.
The combination of (1) ultra-low EUR real yields and (2) the large size of the ECB’s asset purchase programme relative to new Eurozone government bond issuance should theoretically stimulate EUR outflows, as Eurozone investors are crowded out of domestic fixed income markets and search for yield abroad. However, we think these factors will be outweighed by fragility in the risk environment which will not be conducive to portfolio outflows, leaving the EUR supported by its EUR 25bn/month current account surplus. The EUR has outperformed this year as a deteriorating risk environment has left Eurozone domestic investors presumably reluctant to take foreign currency risk by seeking yield overseas. In our view this will likely continue, and we target a move in EURUSD to 1.16 by mid-year.”