Bank Forecast

[Samirofi]

The Pain Trade For The Most Crowded Trade In The world - BofA Merrill

"A single investment thesis has been directing global capital flows over the last two quarters – the consensus that the decoupling of the US economy from the slow growth of the rest of the world will continue. As a result, the USD and US equities have significantly outperformed, while US Treasuries have underperformed:


..The collapse in oil prices over the past two months has provided a further boost to the US decoupling trade as lower energy prices have been viewed as good for US consumers, thus supportive for US equities and the USD. In this sense, the long USD, long US equities and the short energy trades have become one single trade.


Chart of the Day shows the magnitude of the positioning behind the trade may be reaching a dangerous level. CFTC net non-commercial length in S&P 500, USD (especially against the EUR) and crude oil were all at their 52-week extreme as of Tuesday last week. These observations are also supported by our proprietary MAA analysis.




While we remain positive about US economic fundamentals, we are concerned that positioning makes the US decoupling trade vulnerable to shocks. We are also concerned that the trade may have limited room to advance in the short term as it seems unlikely that two legs of the trade (rising USD and falling energy) can continue without creating problems for the third leg of the trade (rising US equities)."

[Samirofi]

World Bank cuts global economic outlook despite oil price drop

(Reuters) - The World Bank on Tuesday lowered its global growth forecast for 2015 and next year due to disappointing economic prospects in the euro zone, Japan and some major emerging economies that offset the benefit of lower oil prices.

The global development lender predicted the global economy would grow 3 percent this year, below a forecast of 3.4 percent made in June, according to its twice-yearly Global Economic Prospects report.

World GDP growth will reach 3.3 percent in 2016, as opposed to a June forecast of 3.5 percent, before dipping to 3.2 percent in 2017, it said.

"The global economy is at a disconcerting juncture," World Bank chief economist Kaushik Basu told reporters. "It is as challenging a moment as it gets for economic forecasting."

The world economy has been more sluggish than expected since the 2007-2009 global financial crisis.

The World Bank said strong growth prospects in the United States and Britain separated them from other rich nations, including members of the euro zone and Japan, which continue to face anemic economies and deflation fears.

"The global economy is running on a single engine, ... the American one," Basu said. "This does not make for a rosy outlook for the world."

Among emerging markets, Brazil and Russia in particular weighed on the bank's global growth predictions, along with China, which is in a managed slowdown as it transitions away from an investment-led growth model.

Basu said India's economic growth should finally catch up to China's next year and in 2017, at a clip of about 7 percent.

Like other forecasters, the World Bank predicted the roughly 60-percent drop in global oil prices since June of last year should be a net positive for the world economy, boosting oil-importing countries.

But while the World Bank expected oil prices to stay low this year, it said the positive price shock could take several years to feed into its growth outlook, while increasing short-term market volatility and reducing investments in unconventional oil such as shale and deep sea oil.

The immediate impact of lower crude prices was limited to a 0.1 percentage point boost to the global outlook this year, the World Bank said.

Falling oil prices could also depress inflation around the world. Fears of deflation, along with overall gloomier global prospects and stagnant U.S. wages, could encourage the U.S. Federal Reserve to raise interest rates more slowly than anticipated, Basu said.

[Samirofi]

Reactions To SNB Move - JP Morgan, Deutsche Bank, SEB

In a surprise move that shocked the market, the Swiss National Bank (SNB) discontinued the minimum exchange rate of CHF 1.20 per euro. The following are the first reactions to this move as provided by the economists and FX strategists at JP Morgan, Deutsche Bank, and SEB Group.


JPM: The SNB’s decision to abandon the floor for EUR/CHF is remarkable but not unwarranted. As we have long argued and indeed positioned for, the SNB was losing the ability to prevent an increasingly justified depreciation in the euro against the franc. The pressure was bought to a head by the prospects for ECB QE and the SNB’s inability to substantially expand its balance sheet from an already bloated 85% of GDP. Most surprising in today’s decision is that the SNB has not chosen to retreats in a managed fashion – it has completely removed the floor such that EUR/CHF is now free floating...We are currently short EUR/CHF through a 1.2088 put, expiry 16 March. This is currently valued around 40%. We will hold for now but look to unwind if spot dips much below 0.90.


DB: The SNB decided to remove the minimum exchange rate floor. This is a huge surprise, and leaves two initial questions: (i) where will EUR/CHF settle and (ii) what is the impact on EUR/USD. On the latter, despite the big drop would say it is *initially* marginally positive in that agressive SNB accumulation is now off the table, implying that we will no longer be getting the EUR-selling reserve diversification flows. Also, EUR/CHF weakness is marginally inflationary for the euro-area. On (i) however this is a HUGE hit to their credibility having committed to the floor for so long...The ultimate impact on EUR/USD is therefore a bit more ambivalent, as it is for global rates: ultimate aim of SNB policy is to encourage outflows but there is also the risk they are forced to come back in to stabilize markets.


SEB: We assume that that the SNB has realized that relative monetary policy is crucial for exchange rates and policy easing by the ECB has weakened the EUR and the CHF substantially against the USD since last summer while inflows to Switzerland has increased and the central bank expects this trend to continue. Markets reacted with a initial huge appreciation of the Swiss franc against all major currencies. EUR/CHF was down to 0.8517 before stabilising at 1.05. Where the EUR/CHF exchange rate will stabilize is impossible to say. The CHF is long-term overvalued from a fundamental stance at any level below the floor. However the attractiveness of the CHF in the context of the Euro zone crisis and the risk of further easing by the ECB as broad based government bond purchases will main the downside pressure in EUR/CHF. The SNB decision today should probably be viewed against the risks the ECB will launch new measures at the upcoming meeting on January 22, which will weaken the euro even further.

[Samirofi]

SNB Action Hints At A Steady EUR/USD Drop From Here - Danske

The SNB this morning scrapped the long-standing 1.20 floor on EUR/CHF and simultaneously lowered its Libor target range by 50bp -0.75% to 0.25% (previously - 0.25% to 0.75%); the rate on sight deposit account balances exceeding a threshold was similarly cut to -0.75%. Recall that the SNB last lowered rates by 25bp in December and thus went into negative territory for the first time.


The surprise move has sent ripples through the FX market and EUR/CHF and USD/CHF initially dropped as low as 0.85 and 0.75, respectively; these sharp moves lower were, however, swiftly reversed and the crosses now trade around 1.01 and 0.86 at the time of writing.


In the press release, the SNB notes that the floor was always meant as a temporary measure to guard against deflationary pressure in Switzerland led by CHF strength brought about by safe-haven flows at the peak of the euro debt crisis.


The SNB cites the likelihood of increased divergence in monetary policy (probably with the ECB versus the Fed in mind) as a reason for the timing of the floor discontinuation (ECB meeting on 22 January should see a QE announcement). Indeed, the EUR/USD de-route ahead of likely ECB easing and Fed hikes later in the year appears to have been the tipping point; thus, the SNB implicitly hints that EUR/USD should continue to drop from here.

[Samirofi]

EUR, CAD: Extreme & Not So Extreme Shorts; AUD: Policy Balancing – CIBC

We usually focus on fundamentals and also on technical analysis, but a lot also depends on the flows.
The team at CIBC examines the flows in EUR, AUD and CAD, and reach interesting conclusions:
Here is their view, courtesy of eFXnews:
The following are the weekly outlooks for the CAD, and AUD as provided by CIBC World Markets.
CAD, EUR: Extreme and Not so Extreme Shorts. Despite all of the apparent negativity surrounding the Canadian dollar in recent months, net short positions against the currency aren’t actually that stretched at the moment. If sentiment did soar further, towards extremes last seen in early 2014, the loonie could be headed for another turn weaker. The same can’t be said of the euro, though.
While ongoing uncertainty surrounding Greece could add to downside pressure in the near-term, net short positioning against the single currency is already close to the extremes witnessed in mid-2012. If negative sentiment eases and growth starts to show signs of life again, the euro could be trading slightly stronger by yearend.



AUD: Policy Balancing Down-Under. The RBA faces an even more precarious balancing act than the BoC as it tries to navigate the economy through the commodity crisis. Australia’s exports are even more sensitive to resources than Canada’s, suggesting an even greater hit to the economy from lower prices and slower global demand.
But alongside that, Australia’s housing market may be even further into bubble territory, with the debt-to-income ratio having risen faster than Canada’s since the start of the millennium.Just like here, the RBA has concluded that risks from the former are greater than the latter, at least in the near-term, and markets expect that last week’s rate cut will be followed by more. Such speculation could add further downside pressure to the Aussie.

[Samirofi]

Goldman: How Much Of A USD Strength Into Upcoming FOMC?

"One reason we adopted a Dollar-bullish stance last year is that we expected Fed forward guidance to fade as the recovery progressed.

Since then, the shift from “considerable time” to “patient” and recent Congressional testimony by Chair Yellen, which talked about a meeting-by-meeting decision on lift-off, have continued to dilute forward guidance, and this month is likely to see a further shift towards data dependence.


Based on the sensitivity of 2-year US yields to data surprises, we think the front end is about two-thirds of the way back to pricing full data dependence, in line with the most recent Macro Rates Analyst, which argues that US rate volatility, including in the front end, has more room to rise.



There is therefore still room for the risk-premium in front-end rates to go up, regardless of whether the Fed hikes in June, September or later (our US economists continue to expect September).


Based on past Fed meetings that downgraded forward guidance, this should translate into Dollar strength around the upcoming FOMC meeting of 2-3%."


Robin Brooks, George Cole and Michael Cahill - Goldman Sachs

[Samirofi]

EUR/USD has much wider implications – BofA Merrill

The crash of EUR/USD below 1.10, and at near 12 year lows at 1.0750 at the time of writing, is a “make the trend your friend” event for many forex traders.

However, it has much wider implications for global markets, as David Woo of Bank of America Merrill Lynch explains:

“In our view, the decline of EUR/USD below 1.10 may be less benign than it looks at first glance:

–Lower EUR/USD is exacerbating the exit from emerging markets. USD/TRY hit an all-time high last week (a risky cut, and USD/MXN is within striking distance of its all-time high reached briefly after the Lehman bankruptcy. Even USD/BRL has moved above 3 for the first time since 2004.




–Lower EUR/USD will likely put more pressure on China to devalue the CNY. As we have argued, a CNY devaluation, which would signal to us that China is joining the currency war, is the biggest tail-risk of 2015.

–Lower EUR/USD will likely place downward pressure on commodity prices,particularly oil prices. Our commodity team continues to think that the balance of risks for oil prices points to further downside given the elevated level of inventory globally.




–If the recent negative correlation between S&P 500 and USD/EUR were to hold,a lower EUR/USD could trigger a more generalized risk-off that would benefit deflationary assets including lower long-term Treasuries. Note that the recent back up in nominal yields has been driven by increased inflation breakevens.”

David Woo – BofA Merrill Lynch

[Samirofi]

How To Prepare For A Less ‘Patient’ Fed? – BNPP

The US dollar enjoyed a nice rally against many currencies in anticipation of Fed tightening. We will probably get a change in wording this week.
How can we prepare for it? Which currency pair is likely to move most? Vassili Serebriakov from BNP Paribas answers:

“The FOMC policy announcement on Wednesday 18 March will be pivotal for the currency (FX) markets. We expect the statement to drop the “patient” reference, but suspect the Fed will be careful in re-iterating data dependence.

In light of the USD’s surge, Chair Yellen may use the press conference to point out that exchange rate effects matter for growth and inflation and, hence, the timing and pace of Fed policy normalization. This would reduce the likelihood of a June hike.

Our economists continue to see September as more likely.


However, any resulting USD pullback should be temporary.

We have taken profit on our short EURUSD trade, but remain long USDJPY with a 125 target.”

[Samirofi]

EUR/USD: Correction Or Trend Change? – Nordea

The question in the title is asked by many: since EUR/USD dipped below 1.05 it has made its way above 1.10, but couldn’t stay there either.


The team at Nordea examines the pair and seeks answers:


The EUR/USD reacted to the ECB QE launch as anticipated, and bounced. The “policy divergence” theme is in question as increasing volatility suggests indecision – and potential for further upward correction in the near term. If the pair reaches 1.1450, we may have to revise our forecasts, which see 1.05 at end 2015.


Squeeze on!
After a relentless fall, EURUSD was finally squeezed during the recent FOMC meeting. This was no news: the EUR has copied the exact JPY reaction after the BoJ announced QQE back in April 2013. This implies a EURUSD correction to 1.12 in the near term. Will that be it? If you look at EURUSD daily volatility, the range has widened over the past year, from just +/- 0.5% to now +/- 1.5%. This implies that market participants are nervous. It comes as no surprise: the CFTC data suggests the positioning is still very much extreme: the USD net long positions are 1.5 standard deviations above historic mean, while the EUR net short positions are 4 above historic mean. This is a historic extreme.
Figure 1. Room for a further squeeze up?




The Draghi show is over.
Applause! It seems that the ECB QE effect on the EURUSD has played out. It was a typical “sell on rumour, buy on fact” reaction. The market has ran a little ahead of itself, bringing the EURUSD much lower than the ECB / Fed relative balance sheet would have implied.
Figure 2. ECB QE priced in?




“Policy divergence” as a theme dominated in the H2 last year, and many extrapolated it into 2015. But with the relative economic growth converging (the Euro zone is now very likely to record faster growth in Q1 than the US!), the “policy divergence” theme loses its shine. While the Fed is priced to hike in December this year, ECB is expected to be on hold until 2018. Big gap. It is important to note that Draghi has changed his tone recently. He sounds now more upbeat on the economic data – the cyclical improvement we are seeing in the sentiment, survey, retail sales data. A similar change in tone last year in April / May, from the positive to negative, marked the start of the downturn in the EURUSD.


The ball is in the Fed’s court.


While there has been a lot of focus on Fed’s first interest rate hike as of late, it becomes clear now that the path rather than the single point matters more for the EURUSD outlook. The Fed has cut it’s median dot Fed funds path by more than 0.5% points across the horizon, aligning it with the official Nordea’s view. So essentially now the Fed would need to bump the projection higher in order to give a further boost to the USD. That is unlikely to happen until the wage growth pick ups.


USD has become the key of the Fed policy focus lately – essentially every Fed member has mentioned it over the past month. The concern is the slowdown in the export market, which we haven’t seen materialise fully as of yet. More importantly, the core inflation, which has been resilient so far, may still slow down in the coming quarters on the USD strength alone.


Figure 3. Downside pressure on core inflation from USD




Above 1.1450 – trend change, below 1.0450 – parity

All in all, it seems the market narrative about the strong US economy and bad Euro zone economy is questioned at the moment. There is thus reason to question the market pricing for the Fed and ECB. Caveat: if the US data keeps disappointing in Q2, and the rest of the world “catches down”, this would raise fears of recession, and the USD will ultimately benefit much more, as the market participants will chase the still high yielding US Treasuries. But this is not our projection as of now.


Short term, a run toward 1.1450 is likely. And only once / if above, we will have to reconsider our call of a lower EURUSD going forward. Alternatively, a move below 1.0450 in the near term will signal the parity within reach.

[Samirofi]

What Will Trigger The Next Leg Of EUR Decline? – Morgan Stanley


The Easter holiday is a good time to look at the bigger picture of EUR/USD. The team at Morgan Stanley discuss the next leg down?

What will move the pair out of the current range? Here are some answers:

The EUR/USD rebound after the March FOMC proved limited and short-lived, highlighting the major underlying bearish trend, notes Morgan Stanley.

“EUR weakness has been driven by several factors, such as the ECB’s QE operations and the growing use of EUR as a global funding currency, both for portfolio and business investment,” MS adds.

While these EUR-bearish factors are set to continue, a question that is now being asked by MS clients is what will be the trigger for the next leg of the EUR decline?

“We believe the answer lies with the major global risk factors – the most important for EUR being the developments in Greece,” MS answers.

“Indeed, we note that EUR/USD has recently changed behavior once again, suggesting that it is not just portfolio and funding flows driving the currency. EUR now appears more exposed to global risks factors. We see Greece as the most likely source of renewed risk for EUR, having the potential to accelerate and extend the bearish momentum,” MS argues.



“Given its deteriorating financial position and the lack of agreement with the EU and other official creditors, the risks of a mishap or accident taking Greece closer to the exit from the eurozone have been increasing since mid-March, in our view,” MS adds.

As a result, MS now see an increased risk of EUR/USD bear case scenario – 0.90 for year-end – being achieved. MS’ EUR/USD year-end forecast currently stands at 1.05.