FX Convictions Parity for EUR/USD
Group Economics Macro & Financial Markets Research
Georgette Boele +31 20 629 7789 Roy Teo +65 65 978616
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24 July 2015 We remain US dollar bullish We have kept in place our long US dollar views versus the euro, the yen, the Australian dollar and the New Zealand dollar. We expect that the US economy will strengthen in the months ahead. This will also trigger a Fed rate hike in September in our view. Currently, money market futures have not even fully priced in one rate hike. We expect two rate hikes this year. This, and the upward adjustment interest rate expectations for 2016 should give a strong boost to the US dollar this year. However, this scenario should play out against the background of positive investor sentiment. If investor sentiment were to deteriorate, it is unlikely that the US dollar will profit unless there is market panic. We expect constructive investor sentiment and certainly not market panic.
EUR/USD to move to parity The resilience of EUR/USD during the escalation of the Greek saga has surprised many. This was mainly because modest risk aversion weighed on the US dollar. Since investor sentiment has improved, the US dollar has gained across the board including versus the euro. Going forward, we expect EUR/USD to test parity in the coming months mainly because of the monetary policy divergence between the US and eurozone. The US dollar is currently driven by cyclical forces, such as the relative economic performance and the outlook for the Fed.
We remain bearish on the yen as headwinds to inflation remain We maintain our bearish view on the yen as headwinds to rising inflationary pressures have surfaced. The Bank of Japan (BoJ) has also downgraded its inflation forecast. Widening interest rate differentials between the US and Japan will continue to weigh on the yen versus the US dollar.
Downgrade of AUD and NZD forecasts We have downgraded our Australian and New Zealand dollar forecasts as weak key commodity export prices will cap any recovery in these currencies. We expect both central banks to ease monetary policy in September to cushion the economy. Both central banks also reiterated that further declines in the exchange rate are likely and necessary. More importantly, financial markets are still under-estimating the magnitude of rate hikes in the US, in our view.