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EUR/USD: Parity coming your way by mid-2016 - Nomura

FXStreet (Delhi) – Research Team at Nomura, suggests that if the ECB is willing to lower its deposit rate continuously during 2016 (perhaps towards -50bp), we think there is finally a high probability that parity (1.00) will be tested.

Key Quotes

“In early 2015, we were reluctant to extrapolate a strong EUR depreciation trend too far, and we have never previously embedded parity in our forecast path for EURUSD. However, we now judge that the likelihood of EURUSD hitting parity is high on a 6-9 month horizon.”

“We officially update our EURUSD forecast pointing to a higher possibility of EURUSD breaking parity, while also adjusting other euro crosses.. We will finalize a global revision of our forecast soon, including revised forecasts for the JPY and commodity currencies.”

“The prospect of historical monetary policy divergence between the ECB and the Fed has again come to the fore in recent weeks. Based on our views on the Fed, the ECB and the global capital flow picture, we now believe there is further downside in store for EURUSD both for the remainder of 2015 and in H1 2016.”

“The most likely timing is mid-2016, as it may take that long for the Fed to deliver its ‘second hike’ and given that market psychology on euro trading has become more cautious than in 2014 and early 2015.”

“A potential upside risk factor to the scenario is the resurgence of negative risk sentiment, which tends to appreciate EUR especially against USD and GBP. But the most recent batch of risk aversion has failed to generate much of a strengthening impulse for the euro.”

“Whether EURUSD can move more substantially lower in 2016 and test and break parity will depend on a number of factors, such as: A) how low the ECB is willing to push the deposit rate, B) how the non-linearity on eurozone negative rates affects the overall global flow situation, and C) how Fed communications play out, in particular how the Fed will communicate on the pace of tightening after lift-off. Those are among the key forces we will continue to track, and which we will use to recalibrate our projections, as needed.”

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