Bank of America Merrill Lynch says FX flows will prop up the US dollar
If Bank of America Merrill Lynch is right, the euro is poised for a sharp fall.
In a note today, they forecast EUR/USD will hit 1.10 by the end of this quarter. That's a nearly 1500 pip decline in 47 trading days. That's a 32-pip drop per day, on average from 1.2500 today.
They say it's all about tax reform and repatriation.
"A major reason for the slide of the USD in the face of tax reform is that the market has come to believe that most of the $3.5trn of foreign earnings that US companies are sitting on is already in USD. The new consensus is that repatriation flows will do no good for the USD," BAML writes.
"We think it is reasonable to assume that at least 30% of the $3.5trn of the foreign earnings are in foreign currencies and that 30% of the money will be repatriated this year. This amounts to $300bn, equivalent to about half of the capital inflows required to finance the current account deficit this year.
This is a pretty big number but if it gets done in the first 6 months of the year, this would be extremely bullish for the USD. This is why we continue to feel comfortable with our 1.10 EUR/USD forecast for end-Q1," BAML says.
That's a tall task.
