"There has been a lot of volatility, but no clear trends to hang our hat on. We put this down to a lack of consistency," BofA argues.
1- Lack of consistency in the data. "US household
consumption has remained weak despite continued improvement in the labor
market. The persistence of diverging household income and expenditure
growth has been puzzling," BofA clarifies.
2- Lack of consistency between theory and the data.
"With the US moving toward closing the output gap, but not the Eurozone,
theory suggests inflation between the two should diverge. However, US
core PCE, which has been declining in the past year, fell to just 1.2%
in May while Eurozone core CPI jumped last month to 0.9%, the highest
reading in 10 months," BofA adds.
3- Lack of consistency between the market and the data.
"The breathtaking Chinese equity rally continues to defy weak data
while the dramatic Bund sell-off has ironically coincided with the
peaking of positive Eurozone data surprises," BofA notes.
EUR/USD: Where We Stand Now?
"Holding steadfast to our core views Until there is more clarity in the data, we are reluctant to swing for the fences. However, recent volatility has only marginally reduced our conviction behind our three core views.
Lower EUR/USD: "Volatility in Bund yields
has been the main driver of EUR/USD volatility lately. We think the
recent Bund sell-off is overdone and expect that, at current levels,
demand from some real money investors such as bank treasuries and life
and pensions to revive. Moreover, net issuance is turning negative in
June and will reach -€120bn in July. In our view, EUR/USD will follow
Bund yields lower over the next two months," BofA argues.
"The Greek crisis is coming to a head. Our view is
that things will likely get worse before they get better. Moreover,
notwithstanding the possibility that a Greek exit may be positive for
the EUR in the long term, we see a potential messy and protracted
divorce as being negative for the EUR in the short term," BofA projects.
"The Ukraine crisis is escalating once again, amid a
surge in violence in eastern Ukraine last week that prompted Prime
Minister Poroshenko to warn of a "full-scale" Russian invasion. German
exports to Russia are already down 30% in 1Q," BofA adds.
"The better-than-expected May nonfarm payroll data,
coupled with strong auto sales and accelerating housing market, has led
our US economic team to maintain their view of a September Fed hike,"
BofA argues.
"We are targeting parity before year-end," BofA projects.
Risk. "The biggest risk to our bearish EUR/USD view is
if Eurozone inflation continues to surprise to the upside. Our European
economics team believes the sharp increase in core CPI in May was due
to a combination of seasonal and technical factors. They also expect the
passthrough from euro depreciation into inflation to be modest as
limited pricing power forces importers to absorb increased costs," BofA
warns.
