Longer-Term Downtrend in Euro / Dollar Rate Still Intact
The recent recovery rally in EUR/USD is really just an opportunity to sell the pair again, says BNP Paribas’ Daniel Katzive, who continues to be bullish the Dollar.
In BNP Paribas' year-ahead road map (published in December at the height of USD optimism), analysts at the French abnk noted a range of risks to the strong-dollar consensus, including US fiscal policy implementation risk, which they anticipated could generate periodic, violent reversals for the USD.
“With the underlying drivers of USD strength still in play, we think it is attractive to use periods of elevated doubt and reduced positioning to add exposure,” says Katzive in a note dated March 3 seen by Pound Sterling Live.
He advocates profiting from the expected move lower using Put Options, which gain in value as the exchange rate moves lower.
“We are adding the 2-month EURUSD put fly recommendation to our portfolio: buy 1x 1.0700 put sell 2x 1.0450 buy 1x 1.0200,” says the Head of FX Strategy in North America for BNP Paribas who adds:
“This strategy is positioned for a grind lower in EURUSD and has 2bp of positive rolldown over the first 2 weeks. The payoff is positive as long as EURUSD finishes above 1.0200 at expiry (and below 1.0700)."
Meaningful Legislation is Likely
The current loss of faith in the ability of the Trump regime to get its stimulus promise ratified by Congress, is overexaggerated, argues the strategist as history shows that whenever the Executive and Congress have been of the same political leaning “meaningful” legislative change has been passed.
On the stimulus front, current pessimism is unwarranted and Katzive calculates a higher than evens chance of it materialising.
“Markets will eventually price in a greater-than-even chance of net fiscal stimulus kicking in by 2018, which, with the economy already growing near trend, would keep pressure on the Fed to deliver further rate hikes,” says Katzive.
Over 50% Chance of a Hike in June
Another reason to be bullish the Dollar is that rate hike bets are not fully pricing in the chance of a rate hike in June, which is actually higher than everyone supposes.
“The Fed has already delivered a rate hike this year far earlier than most had assumed would be possible, and we expect a further hike in June, which has only been about 50% priced in by the rates markets. Strong consumer confidence data released this week showed that sentiment has not declined in tandem with the president’s approval rating,” says Katzive.
Markets are Overestimating chance of ECB Tapering
Looking at the Euro side of the pair, BNP see the chances of the European Central Bank (ECB) tapering their money-printing as over-hyped.
They cite a Reuters report issued on 29 March which cited ECB Governing Council members as wary of triggering a premature tightening of financial conditions.
We note the Euro exchange rate complex fell on the report at the time confirming the currency's senstitivity to this driver.
According to futures positioning analysis the net EUR position has now swung into positive territory for the first time since October 2016, whilst at the same time USD long positioning has collapsed.
The combined EUR and USD positions indicators shows a net long EURUSD exposure which is similar to that observed in early February when markets were pricing in little chance of a Fed rate hike in March.
In the end, there was a hike in March and Katzive things there is a substantial risk of the same thing happening in June.
