Monday, November 23, 2015

Nomura and Morgan Stanley on Dollar/Euro Parity

From Barron's Asia Stocks to Watch, Nov. 18:

Can Euro Hit Parity With The U.S. Dollar?
The U.S. dollar pared back gains in Asian trading after reaching a 7-month high against the Euro as the latest minutes from the Federal Reserve showed a strong intent to raise U.S. rates next month.

The euro rose 0.4% to trade at 1.07 recently. Other currencies gained too. The New Zealand dollar jumped 0.9%, the Australian dollar gained 0.7%, the Korean won gained 0.8%, the new Taiwan dollars rose 0.7% and the Malaysian ringgit jumped 1.2%.

Can the U.S. dollar sustain its gains? Historically, the dollar tends to rally heading into the Fed’s tightening cycle, followed by mixed performance afterwards.

Morgan Stanley thinks so:

The more challenging global environment is likely to leave the USD supported even once the Fed hiking cycle is under way. The impact of a higher USD and rising US rates on a fragile global economy, especially EM and Asia in particular, is set to provide the USD with continued support, we believe. The latest TIC data show that official holders have been sellers of US Treasuries for September. The TIC data show that China and Japan have also been net selling US Treasuries. This would seem consistent with the previously reported reduction in FX reserves in Asia and China in particular. The TIC reporting that China’s holdings of US Treasuries are now at a 7-month low. We view these reduction in FX reserves as a sign of private investor demand for USD, and hence a USD positive factor.
For Morgan Stanley’s view on the euro, check out this Bloomberg video.

Meanwhile, Nomura Securities updated its euro/usd forecast, now seeing euro parity in 6-9 months:

In early 2015, we were reluctant to extrapolate a strong EUR depreciation trend too far, and we have never previously embedded parity in our forecast path for EURUSD. However, we now judge that the likelihood of EURUSD hitting parity is high on a 6-9 month horizon....MORE
1.0623 down 0.0025.