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EUR/USD downside still favourable - Scotiabank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 14, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Analysts at Scotiabank explained that they examined likely EUR paths after the ECB announcement last Thursday.

    Key Quotes:

    "We judge the ECB policy package, which focuses on credit easing, to be risk-positive.

    The ECB’s renewed focus on credit easing rather than rate cuts initially confused the market, but credit and equity markets turned more positive on Friday.

    We think gradual depreciation of EUR/USD became a more likely scenario after the ECB’s action, thanks to better risk sentiment and a higher likelihood of Fed rate hikes.

    The ECB’s policy package is unlikely to be a complete game-changer and the external environment still matters for EUR, but the ECB actions should have positive impact on external circumstances.

    The ECB’s willingness to ease again would matter, if the external environment were to deteriorate again. Although the possibility of a deep rate cut is now lower, our economists judge a small rate cut is still possible when necessary.

    Under our risk scenario of renewed deterioration in global risk sentiment, we judge repetition of the EUR cycle that occurred between the December and March meetings (EUR squeezing higher and ECB easing expectations kicking in) is more likely than the scenario of ECB inaction continuing to push EUR higher to above 1.15.

    This could be a six-month cycle though, rather than a three-month cycle. We believe gradual depreciation of EUR/USD is now more likely after the ECB easing, while short-term EUR appreciation due to negative developments in the external environment cannot be ruled out.

    Thus, we think an optionalised EUR/USD downside position, with a moderate target, is the position to have. Although we booked profits from our EUR/SEK put spread after the ECB meeting, we still hold our EUR/USD digi-put at 1.06."
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