Bank of America / Merrill Lynch with a take on the oil/EUR relationship. The bank maintains a less optimistic view on the EUR but does note how oil may send it higher ...
In summary:
- EUR/USD and oil prices have diverged, which is a factor that still keeps us cautiously optimistic for USD in the medium term
- While lower oil is often good for USD, it has had a further USD-positive impact by driving relative policy differences
- For EUR/USD to persistently break into a 1.20+ type range, we feel there would need to be some break higher in oil as well
More detail:
- The rally in EUR-USD this year has been in part a result of a constant tide of negative US political news, reversing the USD-positive policy optimism at the start of the year. Given the momentum, markets have started to consider the euro climbing above 1.20-type levels more persistently over the next year, which would indeed be above our own estimates of fair value for EUR/USD.
- Our views of the euro are on the pessimistic side, focused on a longer-term 1.15-type level, and we still remain skeptical in terms of expectations for a new substantially higher EUR/USD regime. One key factor for our skepticism is that EUR-USD and oil prices have diverged, although they generally have broadly moved together
- Given our commodities team still looks for WTI in the low $50-range by the end of next year and averaging $50 over the entirety of 2018, we remain reluctant to look for a persistently rising euro from here.
