Credit Suisse explains why it's too early to bet on the buck.
The euro is creeping higher again late in US trading in a sign that there is a relentless, underlying bid.
But Credit Suisse takes a closer look in its weekly FX note to clients, Credit Suisse macro strategy team updates its thoughts on the ongoing correction in EUR/USD, outlining its current forecasts and strategy to trade the cross.
CS reviews the recent data at hand and comes to the following conclusions:
-The current USD consolidation is well in line with the history of corrections within USD bull markets.
--Despite the sell-off in nominal yields, real rate differentials have widened against the EUR.
---The breakdown of the move in nominal EUR rates in real rates and inflation swaps highlights the risk of a potential premature tightening in financial conditions in Europe.
Does the data support the flow argument for a stronger USD?
"For us to believe the current USD move represents a break in the trend, and not just a period of consolidation, we would need to see, amongst other key variables, evidence of a meaningful shift in flow dynamics," CS argues.
"So far the evidence from the data does not give us reason to budge from this core view. Since we first wrote on the topic, the Euro area net portfolio investment balance has registered the largest deficit in over 15 years, primarily driven by a large widening in the net balance for bond investments," CS finds out.
Forecast & Strategy:
"Indeed, while we still hold a 3m 1.05 target for EURUSD (based partly on our non-consensus house view that the Fed will hike in September), we are not adding to existing short EUR positions (now minimal in delta terms) in our model portfolio until we have a clearer view on how these factors will play out. Effectively, we have stood on the sidelines on EURUSD since 8 April - it is still too early to re-engage, in our view," CS advises.
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