Nomura has revised its EUR/USD forecast projecting a gradual depreciation path over the coming months. Nomura outlines 4 main reasons behind this call.
First, the ECB easing package was more substantial than assumed at the time of our last forecast revision back in March. Specifically, money market rates in the eurozone are now set to be anchored very close to zero three to four years out the curve.
Second, while the liquidity-fuelled boost to eurozone risk assets may have further to run, and may attract foreign capital temporarily, we don’t expect a substantial acceleration in inflows. More likely, given the high base of inflows into eurozone equity and peripheral bonds, we think flows are set to moderate as we enter Q3.
Third, Chinese reserve accumulation may also be moderating (from the elevated levels of more than $100bn in Q4 and Q1), and this could imply less recycling flows back into euros in H2 2014.
Fourth, as we enter Q3, Fed communication could well assume a different tone (less dovish). If the Fed is confident that a 3% growth trend has been achieved, and expects to raise rates by mid-2015, then it may start to hint at its intentions with regards to an exit strategy by September. This is especially the case since liquidity normalization will likely take some months, and is likely to precede an actual rate hike.
“On this basis, we expect EURUSD to trade to 1.35 by Q2 2014, 1.32 by Q3 2014, and 1.30 by Q4 2014,” Nomura projects.