EURUSD 'Buy on Declines' a High Conviction @ Westpac
Buy declines in the euro to dollar exchange rate say Westpac, echoing the view of other analysts that the ECB will be unlikely to prompt a major EURUSD slump.
The euro to dollar exchange rate should continue to see weakness as being temorary in nature argue strategists with Westpac in Sydney.
"Look to buy dips in EUR to 1.1230 with a stop at 1.1110. This remains driven by the model and technicals signals; our macro view is neutral as weak German data leaves EUR a poor choice to position for USD vulnerability," says a note from the bank.
Technically, price action in EURUSD has stabilised above key medium term support towards 1.1100, while the Westpac G10 FX model portfolio remains long EUR though pares back its position.
"A sharp fall in our EUR total yield signal ahead of this week’s ECB meeting is the main driver of the reduction but the Eurozone's strong current account momentum signal continues to buttress the model’s ongoing bullish stance on EUR," say Westpac.
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What is certainly clear is that the euro / dollar rate appears to be a decent sideways-trending prospect.
"The market is tied up pondering over resistance above, now at 1.14 and supports below at 1.13 / 1.260 and until one of those are cleared there is little reason for a near-term directional view," says Anders Soderberg at S.E.B.
Soderberg says the broader picture (3 month timeframe) remains negative.
Too Early for ECB Action, EURUSD Upside to be Capped
The October policy meeting at the European Central Bank (ECB) forms the highlight of the week for currency markets as the meeting is considered to be a 'live' one - i.e. the probability of a new policy announcement is elevated.
Of late, several members indicated that it is too early to take action now.
More sideways trading might be on the cards going into the ECB policy decision.
"We don’t expect the ECB to take additional measures yet. Even so, the topside of EUR/USD might be rather well capped as ECB’s Draghi will sound soft and lay the groundwork for more easing, maybe in December," says Piet Lammens at KBC Markets.
ING: Euro to Dollar Rate
Meanwhile, ING's Petr Krpata says the present range-bound direction in the euro / dollar will be maintained.
Prpata argues that fair value in EURUSD is at 1.15 and the exchange rate is presently trading below fair value because the market currently prices in futher action at the ECB in the form of either (a) an extension of the current pace of EUR60bn monthly purchases by another two quarters or (b) a top up of the current programme by almost EUR30bn per month over the remainder of the programme.
Additional moves at the ECB are therefore priced into the conversion.
The big game-changer, it is argued, is the US Federal Reserve.
“In the absence of the Fed’s move, expect a broad EUR/USD range trading. Should the Fed hike rates in December (ING base case), we expect EUR/USD to move towards/below the 1.10 level,” says Krpata.
