EUR/USD: Finding support in cyclical stabilization - CIBC

Analysts at CIBC, expect the euro to find support versus the USD, attributed to either cyclical stabilization – indicated by business sentiment - or flow-driven moves. The key confirmation of this will be the German economy’s performance going forward, as it narrowly avoided recession last quarter according to them. 

Key Quotes: 

“The ECB is currently on hold, as markets await greater details on TLTRO terms at the June meeting. This implies that EUR impetus will come from either cyclical stabilization or flow-driven moves, attributed to its current account surplus. We expect the euro to begin finding some support versus the USD, as it appears to already be breaking out on a trade-weighted basis.”

“We look to early signs of stabilization for cyclical indicators of the Eurozone economy as the reason behind that movement. The key confirmation of this will be the German economy’s performance going forward. The world’s fourth largest economy narrowly avoided a recession last quarter, and there are now signs of a stabilization in business sentiment.”

“From a balance of payments perspective, we’ve already seen net portfolio outflows reduced as the ECB QE program has wound down. The commensurate gain in the EUR has yet to be realized, but we expect that it simply requires more time. Additionally, a broad USD shock is a risk to under-hedged EUR investors that may need to liquidate assets and repatriate funds, thereby causing an increase in volatility.”