EUR/USD: The if’s and but’s - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that given the strength of the market’s conviction that the Fed will be tightening policy in December, it would seem reasonable to expect that bond yields can hold their firmer tone in the near-term. 

Key Quotes

“The case for a continuation of the firmer tone in yields through 2017, however, is more difficult to promote.  For this reason we expect that the USD will give up its recent broad based strength next year.  The outlook for EUR/USD, however, will also be impacted by European politics. If anti-establishment sentiments start to question the coherence of the EU, the significant degree of volatility could be injected into the EUR.”   

“Opinion polls continue to suggest that France’s extreme right candidate Le Pen will be defeated in the second round of the French Presidential elections next spring.  However, the poor performance of polls in capturing the weight of the protest vote in both the UK’s Brexit referendum in June and in the US Presidential election has increased distrust in the pollsters.  A strengthening in anti-establishment sentiment in Europe’s elections next year has the capacity to weigh on the EUR in the first instance (and to keep the safe haven CHF well supported).  However, the downside potential of the EUR in these circumstances may be limited.”

“This morning the ECB has announced that the Eurozone’s current account stood at EUR25.3 bln in September.  This surplus suggests that the EUR is far less vulnerable then GBP to political uncertainty.  Also, if the market seriously began to consider a break down in the EU or in the EUR, a surge into German assets and speculation that Germany and a few core nations could retain the EUR could see it spike.   On the assumption that the EZ will be able to steer a way through next year’s political minefield we see scope for EUR/USD to rise to 1.14 on a 12 mth view.”