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FX Crossroads

EUR/USD: Will history repeat itself?

Thu, May 15 2008, 10:16 GMT
by Danske Research Team

Danske Bank A/S

Summary and conclusions

• • EUR/USD rallied sharply from October 2000 to January 2001, but then spent 18 months trying to clear the January high. While we do not necessarily expect history to repeat itself, a dollar rally may still take longer to materialise than many now seem to expect. We show that while valuation argues in favour of USD strength, as it argued in favour of EUR strength in 2000, fair value estimates are only a long-term anchor for currency markets. Monetary policy cycles seem better in terms of setting the medium-term framework for a currency pair: If we are correct in expecting a turn from the Fed easing to the ECB easing during the summer, this suggests further downside for the euro. However, considering the risk of a prolonged downturn in the US as well as the present hawkishness of the ECB, we could well be in a policy vacuum for several months. Further, though EUR/USD bottomed out in 2000, an uptrend did not really get underway until capital flows turned in favour of the euro in 2002. Presently, net capital flows on both sides of the Atlantic remain supportive of the euro.
  
• • We currently have four open trading recommendations in the G10 space, all established during the past week. We are long EUR/GBP, short EUR/CHF, short EUR/NOK and short NZD/USD.

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Published on  Thu, May 15 2008, 10:20 GMT

Archive

• EUR: Where's my 75bn?
  Published On Wed, Aug 6 2008, 12:43 GMT
• Why the kiwi cannot fly, and at what level NOK/SEK will break the range
  Published On Wed, Jul 23 2008, 15:09 GMT
• GBP set to weaken further over summer
  Published On Thu, Jul 10 2008, 09:45 GMT
• Special edition: Focus on inflation and FX
  Published On Wed, Jun 25 2008, 15:09 GMT
• G10: FX implications of rising food and energy prices
  Published On Wed, May 28 2008, 15:24 GMT

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http://www.danskebank.com/ | danskeresearch@danskebank.com

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