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18 Nov 2015
EURUSD into the ECB and the year-end dynamics – Goldman Sachs
FXStreet (Delhi) – Robin Brooks, Research Analyst at Goldman Sachs, suggests that a common push-back to our expectation for additional, substantial EUR/$ downside is that markets are rational and should price additional ECB easing, which at this point is widely expected for the Dec. 3 meeting.
Key Quotes
“In reality, we think year-end dynamics are interfering with markets’ ability to price further ECB action, much as last year.”
“It was only with the start of 2015 that markets began to aggressively price QE. EUR/$ fell from 1.21 to 1.16 in the three weeks ahead of Jan. 22, such that the bulk of ECB QE was priced by Jan. 22 (EUR/$ only fell from 1.16 to 1.14 that day). It is due to a similar year-end dynamic, a reluctance to position aggressively before the Dec. 31 cut-off, that we expect only modest further declines for EUR/$ ahead of Dec. 3,where our target for Dec. 2 remains 1.05.”
“We think EUR/$ will fall 2-3 big figures on Dec. 3 and then another 2 big figures on Fed lift-off on Dec. 16, taking us to parity by year-end. Given that the beginning of 2016 is likely to bring renewed vigour to risk-taking, we think it is perfectly possible for EUR/$ to reach 0.95 – our 12-month forecast – by end-March.”
“One of the reasons we expect plenty of Euro downside is that – in our assessment – little is priced for Dec. 3. On Oct. 22, when President Draghi put another deposit cut on the table, EUR/$ fell – grudgingly – from 1.13 to 1.11, essentially pricing a 10 bps deposit cut. The next day, Oct. 23, EUR/$ edged lower to 1.10, pricing some expectations for additional balance sheet expansion (we think little was priced in this regard at 1.13). The move since then has reflected largely the more hawkish FOMC statement on Oct. 29 and much stronger-than-expected payrolls. In other words, at 1.08 we think EUR/$ is pricing little more than a 10 bps deposit cut and around EUR 200 bn in additional balance sheet expansion. The hurdle for President Draghi to surprise on the dovish side is therefore low.”
Key Quotes
“In reality, we think year-end dynamics are interfering with markets’ ability to price further ECB action, much as last year.”
“It was only with the start of 2015 that markets began to aggressively price QE. EUR/$ fell from 1.21 to 1.16 in the three weeks ahead of Jan. 22, such that the bulk of ECB QE was priced by Jan. 22 (EUR/$ only fell from 1.16 to 1.14 that day). It is due to a similar year-end dynamic, a reluctance to position aggressively before the Dec. 31 cut-off, that we expect only modest further declines for EUR/$ ahead of Dec. 3,where our target for Dec. 2 remains 1.05.”
“We think EUR/$ will fall 2-3 big figures on Dec. 3 and then another 2 big figures on Fed lift-off on Dec. 16, taking us to parity by year-end. Given that the beginning of 2016 is likely to bring renewed vigour to risk-taking, we think it is perfectly possible for EUR/$ to reach 0.95 – our 12-month forecast – by end-March.”
“One of the reasons we expect plenty of Euro downside is that – in our assessment – little is priced for Dec. 3. On Oct. 22, when President Draghi put another deposit cut on the table, EUR/$ fell – grudgingly – from 1.13 to 1.11, essentially pricing a 10 bps deposit cut. The next day, Oct. 23, EUR/$ edged lower to 1.10, pricing some expectations for additional balance sheet expansion (we think little was priced in this regard at 1.13). The move since then has reflected largely the more hawkish FOMC statement on Oct. 29 and much stronger-than-expected payrolls. In other words, at 1.08 we think EUR/$ is pricing little more than a 10 bps deposit cut and around EUR 200 bn in additional balance sheet expansion. The hurdle for President Draghi to surprise on the dovish side is therefore low.”