Well, actually that's what BOFAML says
I think they're mad as a box of frogs myself but what do I know? Anyway, stop me if you've heard this one before.
They see EURUSD falling below parity by the end of the year. To 0.9500 no less, according to their latest note;
Themes: ECB trying to get ahead of the curve again:
Following the market disappointment from the December meeting and even lower inflation data, the ECB almost pre-committed in the January meeting for more policy easing, most likely in March. This is consistent with our view that the ECB will be forced to do more this year and, if anything, it is happening even sooner than we had expected. However, the market does not seem impressed. A 10bp deposit rate cut was already priced in for this year. Following the December disappointment, investors seem skeptical whether the ECB could really overwhelm with decisive further action. The Euro, as a funding currency, is finding support in the risk-off market environment so far this year. And the market has also priced less Fed hikes after weak manufacturing data in the US.
Positioning in the vol space may have also kept EUR/USD within a range after the ECB. We remain bearish EUR, but expect the path to remain choppy. If anything, the price action so far this year validates our strategy of selling EUR rallies, rather than being short EUR.More ECB easing and Fed rate hikes should eventually drive the Euro down, but a gradual ECB approach and a cautious Fed in response to mixed data suggest that EUR/USD may not weaken substantially yet and that the path will not be smooth.
Forecasts: EUR to end the year below parity: We continue to expect EUR/USD to end the year at 0.95. This projection is consistent with our adjusted equilibrium estimate based on the large difference between the output gaps of the Eurozone and the US. Our projection also assumes more ECB easing and three Fed hikes this year. We have only marked to market our Q1 projection, to 1.05 from parity, taking into account the price action so far this year.
Risks: mostly to the upside: Despite expecting more ECB easing, the risks to our EUR projections are tilted to the upside. If the global market sell-off intensifies, or US data outside the labor market does not improve, the Fed may stay on hold for most of the year. The strong USD seems to be affecting US manufacturing data, which could force a Fed reaction. Moreover, investors are currently focusing on the risk sell-off and the collapse in commodity prices, which puts the theme of diverging monetary policies on hold for now.
I can't fault their strategy of selling rallies rather than building up a core short. I also like their risk reasoning but it's only half the story. They neglect to mention what happens if inflation does actually pick up in the EZ or the economy improves. Small risks maybe to some but still a risk, and as traders we always need to be able to look at both sides of the coin.
What are your thoughts?
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