Nomura Maintain Bullish Euro-Dollar Rate Stance

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The Euro will outperform the Dollar in 2021 says Nomura, but those wanting a stronger single currency will have to exercise patience as the rally is likely to come later in the year.

Nevertheless, the investment's bank's forecasts show those backing a stronger Euro could be rewarded with a Euro-to-Dollar exchange rate (EUR/USD) that ends the year closer to 1.30 than 1.20.

EUR/USD rallied through the second half of 2020 as the safe-haven demand for dollars during the covid-19 market panic gave way to a recovery trade that took the pair back to 1.20.

"Accelerated trade flows last year were likely a key factor behind EUR’s strength. But that was when financial inflows were also supportive: that might not be the case now and that is why our conviction in EUR/USD is lower now than it was," says Jordan Rochester, a foreign exchange strategist with Nomura in London.

"Rangebound in February until vaccine data accelerates," he adds.

EUR/USD has trended lower since January 06, when a peak at 1.2349 was posted, leading investors to question a consensus view that 2021 would be characterised by Dollar weakness.

Eurozone balance of payments data for December confirmed Nomura's "suspicion" that Eurozone investor outflows are accelerating, "making it tougher for the trend higher in EUR to continue at the same pace".

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But while the Euro will likely struggle to gain traction against the Dollar, it is at risk of coming under outright pressure against other cyclical currencies that have a high beta (i.e. are positively correlated to stock markets).

"For now we have a higher conviction that EUR will underperform high beta FX," says Rochester.

Nevertheless, expectations for Eurozone growth to recover this year still leads them to expect US Dollar weakness.

"Once the euro area vaccination programme accelerates, a US fiscal stimulus in early March feeds through to wider US trade deficits and perhaps Mario Draghi shows signs of reform progress in Italy we expect a higher EUR/USD toward 1.28 by year-end," says Rochester.

The analyst says the Euro-Dollar exchange rate is currently the subject of a tug of war between strong trade flows and weak financial inflows.

Nomura are currently betting against the Euro against the British Pound, saying short EUR/GBP is a favoured trade, as is a short EUR/AUD.

"But for EUR optimists we also expect EUR/JPY and EUR/CHF appreciation to stem from higher commodity prices and US yields," says Rochester.

Nomura forecast Euro-Dollar at 1.25 by end-March/April, with 1.28 seen by the end of the year.