BNP Paribas makes the case for fading EUR/USD rally
projecting a significant scope for the pair to fall from current levels.
BNPP already followed on that today by establishing a short EUR/USD
position.
The following are BNPP's rationale behind this call along with the details of its EUR/USD short position
Valuations: "EURUSD levels are starting to look expensive even compared to the very depressed level of US front-end rates," BNPP argues.
Risk Sentiment: Specifically for EURUSD, BNPP considers the following (simplified) risk scenarios:
"1- Further risk-on - Eurozone capital outflows resume and markets start to reprice Fed hikes = EURUSD lower.
2- Stable risk - Without a strong impulse from risk
sentiment, the eurozone's trade surplus is probably still putting some
natural upward pressure on EURUSD. But with valuations already
expensive, EUR funding should be more attractive = no clear signal for
EURUSD.
3- Return of risk-off - EURUSD continues to rally,
which forces the ECB to step up dovish rhetoric and ultimately ease
policy = EURUSD first higher, then lower," BNPP adds.
"The bottom line is that as long as we assume that the
Fed and the ECB have a positive sensitivity to risk but are only able
to move away from their policies in one direction, namely toward Fed
hikes or ECB easing, risk-on should lead to Fed tightening and risk-off
to ECB easing. Both outcomes favour a lower EURUSD," BNPP argues.
In this context,BNPP notes that the key event next week will be the ECB's rate decision on Thursday 22 October.
"Our economists do not expect a change in policy, but expect
the press conference to reiterate Nowotny's dovish comments earlier this
week, highlighting that inflation remains clearly below the ECB's
target. Our economists continue to expect an extension of the
ECB's asset purchase programme (APP) beyond September 2016, most likely
to be announced in December 2015," BNPP projects.
In line with this view, BNPP entered a short EUR/USD position today from 1.1450, with a target at 1.0900, and a stop at 1.1630.
