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12 Dec 2014
Sell EUR/USD to target 1.16-1.20 - Westpac
FXStreet (Bali) - Richard Franulovic, FX Strategist at Westpac, recommends to sell EUR/USD to target 1.16-1.20 as one of the top Q1 2015 for the bank.
Key Quotes
"Long USD may be a well-owned consensus trade but it remains a good bet into 2014H1. The approach of the Fed’s lift-off from the zero-bound should provide the key near term support for the USD. As the chart across shows, the historical template points to steady gains for the USD ahead of policy tightening, with the USD typically rallying in the six months going into the commencement of policy tightening. A closer look at history shows that the real broad USD rose in the six months prior to Fed tightening in each of the last fi ve cycles since the early 1980s, without exception."
"The near certainty of sovereign ECB purchases in Q1, cemented by the paltry uptake at second TLTRO, will make for an eye-watering divergence in Fed and ECB policy. One need not go back for a historical analogue and what such a divergence may mean for exchange rates. In H1 2011 the Fed was knee-deep in QE2 while the ECB hiked the refi rate by 50bp in an ill-considered attempt to normalise policy. Between Jan 2011 and May 2011 EUR/USD rose 20 big fi gures. EUR/USD has admittedly already fallen around 15 big fi gures from its May 2014 highs but we would argue EUR/USD was heavily overvalued at its highs then."
"While USD price action in the six months following the start of a tightening cycle is typically more mundane with the USD on average recording a fl at performance over the last fi ve cycles (see across), that is more of a story for H2 2015, assuming the Fed starts tightening mid-year. Our preferred strategy is to be short EUR/USD right here (1.2410), adding to the position on a bounce to 1.2600, targeting initially 1.2000 in Q1 2015 and then the late 2005 lows of 1.1640."
Key Quotes
"Long USD may be a well-owned consensus trade but it remains a good bet into 2014H1. The approach of the Fed’s lift-off from the zero-bound should provide the key near term support for the USD. As the chart across shows, the historical template points to steady gains for the USD ahead of policy tightening, with the USD typically rallying in the six months going into the commencement of policy tightening. A closer look at history shows that the real broad USD rose in the six months prior to Fed tightening in each of the last fi ve cycles since the early 1980s, without exception."
"The near certainty of sovereign ECB purchases in Q1, cemented by the paltry uptake at second TLTRO, will make for an eye-watering divergence in Fed and ECB policy. One need not go back for a historical analogue and what such a divergence may mean for exchange rates. In H1 2011 the Fed was knee-deep in QE2 while the ECB hiked the refi rate by 50bp in an ill-considered attempt to normalise policy. Between Jan 2011 and May 2011 EUR/USD rose 20 big fi gures. EUR/USD has admittedly already fallen around 15 big fi gures from its May 2014 highs but we would argue EUR/USD was heavily overvalued at its highs then."
"While USD price action in the six months following the start of a tightening cycle is typically more mundane with the USD on average recording a fl at performance over the last fi ve cycles (see across), that is more of a story for H2 2015, assuming the Fed starts tightening mid-year. Our preferred strategy is to be short EUR/USD right here (1.2410), adding to the position on a bounce to 1.2600, targeting initially 1.2000 in Q1 2015 and then the late 2005 lows of 1.1640."