Euro Exchange Rate Rally Further to Go Before Falling to Parity

Now is not yet the time to bet against the euro says a new currency forecast released by TD Securities who were spot on when they called the rally that we are currently witnessing.

TD Securities believe that euro / dollar exchange rate (EURUSD) will trade lower over a 12-month horizon, but they think the balance of risk is shifting towards the currency pair continuing to trade in 'limbo' over the coming 4-6 weeks.

The call comes as the shared currency continues to trade with a firm tone - the euro to dollar exchange rate conversion is presently seen at 1.1421 and appears to be well on its way to the 1.15 area, this strength will surely see people think twice before betting against the shared currency:

But, the gains will not last says Mazen Issa, Senior FX Strategist at TD Securities in Toronto. No doubt those that watched the impressive decline in EURUSD over 2014-2015 will be wondering when they will be able profit on the resumption of this weakness.  

“Now that we have had a washout in the DXY and a strong appreciation of the EUR with an aggressive selloff in German bunds, we think the broader downtrend in EURUSD will eventually resume once Fed rate hike expectations firm. This may not be evident until mid-June however.”

We would suggest that betting against the euro in the current environment is futile, note how in the above graph the EUR-USD has crossed above the 20 day moving average, this is confirmation that momentum is returning to the currency. A break above the 50 day moving average could encourage yet more buyers into a momentum trade.

However, keep in mind that the US Fed remains on the path to raising interest rates and this is an unequivocal pro for the Greenback. Those suggesting the dollar will outperform in the second half of the year are certainly still in the majority.

“If the Fed is on course to hike in September, then the euro rally has indeed stalled and current price action should be viewed as an opportune time to reinitiate shorts. But patience is required. We do not see an urgency to jump into this trade as the June FOMC meeting and incoming data until then will potentially serve as the key inflection point for EURUSD directionality,” says Issa.

Betting Against The Euro

We reported earlier this week that strategists at Barclays recommended to clients that the current recovery in the euro dollar exchange rate represents a good time to bet against the euro by buying dollars.

Barclays and TD Securities both recognise the importance of rising Eurozone bond yields as the prime driver of current euro strength. “While the euro area rates sell-off may have some fundamental justification, we are convinced that the move has overextended and was exacerbated by the combination of positioning and market liquidity issues,” says Jose Wynne at Barclays.

The British bank are ultimately pricing in a fall to parity and beyond. With such declines ahead those looking to profit on such a decline could well afford to enter a trade with a wide stop-loss, being set at 1.15 and above.

Our report did also point out that just as there are those suggesting the euro’s rally will start fading there are also institutional strategists who are geared for yet further climbs.

Westpac, for instance, is one institution who suggests the EUR-USD could climb to 1.15.

We would err to the side of waiting for further climbs to be realised. When the rally does turn a corner we believe it will let us know by consolidating - maybe at 1.15. This will allow us to set stop-loss levels and await the pick-up in US data releases that could well trigger the fall to parity.