Forex: How far could go the Euro? 1.40 or even 1.50? - Banks analysis

Share | (San Francisco) - Goldman Sachs said in a recent report that their 3-month target is 1.25, but its 1-year target is 1.40. Kathy lien, from BK, thinks that 1.50, despite it is a "big round number" and people like this kind of numbers, the "1.35 is a far more realistic target than 1.50.

On the other hand, Rabobank has revised their "FX forecasts on a 1 to 6 mth view to take account of more USD weakness although we maintain our call that EUR/USD will be positioned around 1.35 on a 12 mth view." Rabobank analyst believes that the "USD could be on the back foot for some time," but they "expect EUR/USD to push higher next year." In fact, 1, 3 and 6 month target are bearish to 1.26, 1.28 and 1.30 respectively, but 12-month target is higher to 1.35.

Rabobank says that both Euro and Dollar are experiencing the same conditions with the new QE plan that they "traded in the spring when the impact of the ECB's LTROs was lifting risk appetite."

On Thursday, the Federal Reserve launched its open-end QE3 plan and overal sentiment was positive as far as market bought it as Mauricio Carrillo from commented in his twitter account:"No QE3 really, it is unlimited QE," because "Fed provides no limit for buying, not amount, not time, just says 40 billion per month."

UBS' analysts Geoffrey Yu and Eamon Aghdasi affirms in a recent paper "Fed's new 'open-ended' easing program has sparked a sharp rally in risk assets and significant dollar under performance." Yesterday's QE3 announcement from the Fed continued lift U.S. stocks on Friday as it did on Thursday.

On Friday, the Dow Jones Industrial Average rallied 53.51 points, or 0.4% to 13,593.37, climbing 2.2% on the week. The S&P 500 gained 5.78 points, or 0.4% to 1,465.77, finishing up 1.9% on the week. The Nasdaq Composite added 28.12 points, or 0.9%, to 3,183.95, recording a 1.5% gain for the week.

Goldman Sachs prefers to avoid the euphoria as the financial institution "has decided not to change our EUR/$ forecast at this stage, even though spot has clearly moved through our 3-month target of 1.25."

"First, it is clear that we expect further appreciation on a trend basis, as visible in our unchanged 1.40 forecast on a 12-month basis," Goldman affirms. "And second [...] many factors remain open-ended with regards to the EUR risk premium. The apparent delay in Spain's request for financial assistance is one example and other setbacks could lead to temporary sell-offs in the EUR after the strong rally in recent weeks."

Goldman maintains their "3-, 6- and 12-month forecast for EUR/$ at 1.25, 1.33 and 1.40 respectively, and for $/¥ at 77.0, 76.0 and 74.0."

Wells Fargo expects the Euro to gain further in the short term but bearish in the big picture. "The ECB's bond buying proposals, along with other important policy developments, have driven an improvement in European bond markets and the euro," points the Wells Fargo analysts team. "We expect that improvement to extend further in the next several weeks. The longerterm euro trend remains lower however, given the Eurozone's economic underperformance and as the European monetary policy stance remains very accommodative."

What about the 1.50? Kathy Lien sees it unrealistic. "In order for EUR/USD to rise to 1.50 like it did back in 2011, we need the Federal Reserve and the ECB to be running significantly divergent monetary policies," Lien states. "Between January and of April 2011, the EUR/USD was on a tear, rallying from a low of 1.2860 to a high just shy of 1.50 at 1.4940. During that time the ECB raised interest rates as the Federal Reserve was in the process of implementing QE2."

"Obviously that is not where we are at right now and while we believe that the EUR/USD could have more room to rise, 1.35 is a far more realistic target than 1.50," Lien concluded.

The week ahead

As a short week ahead preview, UBS analysts expect "a relatively quiet week will guide investors back towards Data watch mode. BoJ is not expected to announce any new stimulus measures in their policy meeting. Macro indicators such as UK CPI, German ZEW, New Zealand GDP are due next week alongside Riksbank and BoE minutes."

COT report

Finally, the TD Securities team released its COT report with interestig data about the Euro positions: "The net short EUR position was trimmed decently to 93.7k contracts (or USD 15.1bn), from 102.3k, While this is the lowest level since early April, net EUR shorts still represent the largest aggregate position among currency speculators. With the EUR's dramatic rise through the balance of this week, however, a good chunk of these will have likely been squeezed out."

On the USD exposure, the TD team commented that "IMM non-commercial accounts further cut exposure to the USD in the week through Tuesday, September 11. The aggregate USD short position stretched to USD11.7 bn, from USD2.8 bn in the week prior, as investors turned sour on the USD ahead of the Thursday's FOMC meeting."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Forex and Currencies

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