Forex Institutional Research: Deutsche Bank FX Daily
Key quotes from the Deutsche Bank FX report:
Following last month’s ECB and Fed meetings, we pushed our EUR/USD parity forecast out to the end of the year, anticipating a period of stability in coming months. We see small upside risks to the euro following the ECB press conference today but little to change our medium-term outlook.
First, despite recent Fed dovishness, the real rate differential between Europe and the US is not signaling a large divergence in FX versus monetary policy expectations. EUR/USD “fair value” is a little above 1.15 on rate differentials, suggesting small upside risks post a “no news” ECB day. To change our medium-term euro view, we would need to agree with current market pricing, that the Fed is on hold this year. We don’t: one or two hikes seems more reasonable.
Second, the underlying flow picture – our Euroglut thesis – is not changing either. Updated portfolio flow data released this week show that the relentless fixed income outflows from Europe continue at full speed, currently running at an annualized half a trillion euros (chart 2). There is little to suggest that hedging behaviour on these flows should be changing either: 1-yr euro cross-currency basis is reasonably stable, in contrast to Japan where the cost has more than doubled in recent months. Finally, we don’t think that the medium-term dollar bull trend is over. The recent dollar correction is not unusual for medium-term cycles (chart 3). And medium-term tops only happen when the dollar turns into a low-yielding currency (chart 4). The greenback is currently a mid-yielder – and is still on track for higher, not lower, yield rankings by the end of the year.
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