I haven’t read any bank research in a long while, but I thought it might be interesting to see what the street had to say about the recent break through 1.50. My quick thoughts are in italics:
UBS – With the EURUSD break of 1.50, we are not tempted to fade this latest US dollar move. The decoupling theory is proving true so far in Europe, with the German Ifo index surprising on the upside, helping Eurozone 2-year yields rise by 5bp. In contrast, the slump in consumer confidence in the US pushed US 2-year yields lower by 11bp. Consequently, the latest bout of weakness in the US dollar has been all about yield differentials and relative growth expectations, coupled with a clearing out of consensus positive dollar views. If the dollar longs have been cleared out, is it time to start building a short position?
ABN technical analysis – The strong and vicious break above the major barrier around 1.4863 has cleared the way to the major price projections on the daily and weekly charts. This projection range starts at roughly 1.5100 (weekly) and 1.5190 (daily). Short-term momentum is sky-high but not overextended. The RSI is overbought (86) but since the market is engaged in a breakout move, not too much value should be given to this indicator. Buy the dips when they occur. Dipping below 1.4860 will shake the bullish outlook. Sky high, but not overextended?
ABN fundamental analysis – The DXY index has fallen to 74.46, also a record low. In addition to the fresh widening in interest rate differentials, one of the key drivers of this move appears to be the surge of oil prices above the $101 level as petro-dollars are channelled into the EUR. Dovish comments by Fed’s Kohn also added impetus to the USD’s decline. Kohn noted that growth risks are a bigger threat than inflation which has led the market to look for another 50bp rate cut in March or possibly sooner. Or is it that are oil prices responding to the weaker dollar?
SEB macroeconomics – Although the US dollar is close to extreme undervalued levels against the euro this is not the case when looking at the trade weighted US dollar which has become only slightly cheap compared with our PPP estimate (lower chart). The upshot is that should the weak US dollar be seen as an independent problem by a central bank, for example the ECB, currency intervention is unlikely to work.
As long as the US dollar is not dirt cheap in trade-weighted terms, central bank intervention to dampen appreciation is unlikely to be fruitful. The one instrument that would work is lower policy rates. The EUR/USD thus carries upside risk as long as this is not deemed an option by the ECB. A higher euro protects the euro area economy against the escalating oil price, but exporters will be hurting and the argument can be made that the euro is unfairly shouldering the burden of dollar depreciation, as much of the world continues to retain artificially low currencies. The ECB has to weight the pros and the cons but I believe the risk of talk of concerted action has risen substantially.