Focus FX Currency Forecast

16 Februarie 2011

RAIFFEISEN BANK S.A.

 

EUR/USD

EUR/USD: 1.351 - 1.30 (March)

EUR/USD has once again corrected to around 1.35 in recent days. In our opinion, this can primarily be attributed to the market's exaggerated interest rate hike expectations regarding the ECB at the beginning of the month, which are now (justifiably) starting to decline again. We see these changing interest rate expectations as one of the key drivers for EUR/USD going forward: If, as expected, the US labour market continues to improve in the coming months and, in turn, expectations that the Fed will hike interest rates towards the end of the year increase, while the ECB continues to have its hands tied as a result of the lack of a "solution" to the EUR debt crisis, our EUR/USD forecasts are easily reachable. Therefore, the next important milestone for EUR/USD is the EU summit in March, at which a conclusive revision of the safety net is expected and the course for how to deal with the debt crisis moving forward will be set. Hopes of a "masterstroke" will likely prevent EUR/USD from crashing in the meantime. However, there is a tremendous risk that the measures adopted will not convince investors and that EUR/USD will subsequently come under pressure. Until then, there is a great deal of room for news-driven fluctuations: For example, the recent concerns surrounding a split of WestLB and the possibility of associated haircuts for (senior) bank bonds. A decision about how to proceed in the case of WestLB is imminent, and we believe that haircuts for senior bonds are very unlikely. Concerns about the consolidation process in the EUR peripheral countries will likely be fuelled by the GDP data released this week, which will show shrinking economic activity in Q4 for countries such as Ireland, Portugal and Greece (but not for Spain, which achieved +0.2% p.q.!).

Trading Ideas

Note: This list contains only the strongest trading ideas for the markets that we cover. Therefore not every market forecast that implies a buy recommendation is also listed as a trading idea! Trading ideas may also differ from our quarterly forecasts. as the time horizon can be different. The time horizon of the trade is at least two weeks, but not more than 3 months.

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