For all the uncertainty around the global economy, data has followed a remarkably consistent pattern since 2009: it has weakened sharply over the summer months but bounced strongly into winter. There are both technical (faulty post-2008 seasonality adjustments) and fundamental explanations (Eurozone crisis breakouts have all happened in the summer) behind the pattern, but it is evident across real data as well as economic surprise indicators. This trend is one reason to be bullish into the New Year, but beyond that we think the market is underestimating the significance of lower tail in the Eurozone. The three biggest sell-offs in the MSCI world index since 2009 have all coincided with a Eurozone tail event (always in May!), the lower likelihood of which next year will remove a major headwind to risk appetite into 2013. Positive risk appetite will help our bullish EUR/USD view as we head into 2013, in addition to a building Asia FX reserve rebalancing dynamic and new record lows in US real yields ahead of next week’s FOMC. Before that, today marks the last ECB meeting of the year, which will set the tone of monetary policy expectations heading into 2013. We expect the ECB to be dovish – backed by significant revisions lower to staff growth and inflation forecasts for the next two years. But absent a clear signal that a deposit rate cut is imminent (accompanied by deposit limits on the ECB current account) and a shrinking ECB balance sheet, we don’t believe central bank dovishness has potential to materially drive EUR/USD beyond near-term price action.
Indeed, we remain bullish on EUR not just versus the USD, but against JPY, GBP and CHF. On EUR/GBP, we continue to target 0.85 on the back of a resumption of capital outflows from domestic investors and the close to record high correlation with foreign equities. On EUR/CHF, we continue to think that the 1.20-1.22 range should not be taken for granted, with a potential for an extension to at least 1.25. This week, a large Swiss bank introduced charges on CHF deposits, causing a modest widening in FX forward points. We would need to see a more meaningful move on implied FX rates for these decisions to be game-changing but we do see the broader rally in European risk assets combined with the close to 140bn EUR of speculative inflows over the summer as having the potential to trigger a self-fulfilling unwind of CHF longs. This week’s higher charges on Swiss franc balance sheets could be one potential trigger, and we continue to view EUR/CHF longs as a particularly good risk reward.
Deutsche Bank