EUR/USD Bears Predict 1.0-1.20, Rallying Towards Downtrend In Meantime

I decided to securitize all of the bearish views I found on the euro (EUR/USD) recently in this post. Are there any die-hard EUR/USD bulls anywhere? It makes sense given that there's a risk of a "euro quake" in the next few months as the EU, ECB, and everyone else, try to engineer a soft landing for the Eurozone sovereign debt and banking crisis. Since December of 2011, currency strategists, economists, traders, and a currency hedge fund manager, had targets on EUR/USD between 0.90 and 1.20. Right now at 4:34am EST, EUR/USD is trading at 1.27923 after hitting a low of 1.26663 early yesterday morning. A nice squeeze is taking place, and it is back trading in the intermediate descending channel that formed on Thursday (which was pierced on Fri). Look how short large speculators are in Euro FX futures (h/t GM). EUR/USD is trying to figure out which channel to trade in as large chunks of European sovereign debt mature in the next few months (1, 2). As noted in my previous post, if EUR/USD wants to test support in the "death channel", it would be around 1.14 in January and 1.08-1.10 in February.

I'm reading an FT article (Euro shift highlights revival in carry trade) that says "reduced expectations" of Fed QE3 and "predictions" that the ECB will lower rates further, are causing investors to use the euro as a funding currency in carry trades (selling the euro to buy other currencies). Read UBS' thoughts on this as well. There's an ECB meeting on January 12 (articles: 1, 2, 3, 4) and a Fed meeting on January 24-5. On December 8, the ECB announced a 3-year LTRO (loans to banks), which is now being seen as indirect QE. It all depends on the ECB/FED QE and interest rate differential.

1) First up, Simon Derrick, chief currency strategist at Bank of New York Mellon, who correctly predicted the euro would fall to 1.30 by the end of 2011, believes 1.20 is in the cards in Q1.

"So Mario Draghi (ECB President) may well be saying, "I cannot be a lender to the sovereign nations", but the very fact of what he's doing, and doing this longer-term LTRO, is precisely what he's doing, is just doing it indirectly by the banks."

"Well, this is why I ultimately think this is going to end up as being QE. Because the only way they can ultimately afford to do it is to turn the printing presses on. If this is going to be constantly sterilized, then there is going to be the issue where they need to get more capital. So the only way they will be able to deal with this over the long-run is to print more capital." "My view is that we're going to be in the low 1.20s at some point in the first quarter." (*Bloomberg Video, 12/21/2011)

He also said to monitor European sovereign credit ratings. A big downgrade could cause a political backlash. Derrick publishes a "Morning Briefing" at BNY Mellon's website. He posted a note yesterday. Here are a few quotes.

"It was hoped by some officials that the ECB's late December LTRO might provide the fuel for renewed purchases of peripheral Eurozone sovereign debt by European banks. Unfortunately, there is little evidence so far to suggest that this is happening."

"Unfortunately, although the ECB might well be fulfilling its remit as lender of last resort to the banking system, politician’s hopes that this might indirectly extend to sovereign nations such as Italy have so far proved ill founded. In other words the LTRO was most definitely not the “determined policy response” called for. If so (and in the absence of a fresh policy response from the Eurozone nations themselves) then we must assume that the risk “of a full-blown sovereign liquidity crisis” in Italy has increased. The upcoming auction of 5 year BTPs on Friday of this week could therefore prove particularly interesting." (*BNY Mellon, Morning Briefing)

2) Gary Shilling, president of A. Gary Shilling & Co, thinks parity (1:1) is possible for EUR/USD. But his intermediate target is 1.20.

"My intermediate target is 1.20, and we are closing in on that, but I think parity is possible because there is a question as to whether they can hold the thing together."

Shilling also expects a major European bank to fail, or get bailed out, in 2012. Unicredit is down 11% today (read: UniCredit rights issue will pave the way for European ECM). And he said the major risk to the U.S. is financial contagion.

"27% of U.S. foreign bank exposure (loan, leases, derivatives on a net basis) is in the euro zone. And we've already seen MF Global bite the dust, so there's probably more risk there." (*Bloomberg Video, 12/16/2011)

3) John Taylor, founder of currency hedge fund FX Concepts, also thinks parity is possible. He called for low 1.20s in October.

"“It’s a distinct possibility” that the euro could weaken to trade on a one-to-one basis with its U.S. counterpart in the next 18 months, he said." (*Bloomberg, 12/15/2011)

4)The Euro Could Fall to Parity With the Dollar in 2012: PIMCO

"“Parity with the dollar next year is not out of the question,” said Mather in a phone interview Wednesday. “I am more bearish on the euro now than three months ago.” (*WSJ, 12/14/2011)

5) Top Forecasters Split on Euro as No. 1 Wells Fargo Sees Drop: Nick Bennenbroek, head of currency strategy at Wells Fargo, predicts 1.24 in the first half. Westpac Banking Corp predicts 1.20. (*Bloomberg, 1/9/2011)

6) UBS recommendation: selling EUR/USD at 1.2755

"UBS recommends selling EUR/USD at 1.2755, with a target of 1.2250, and a stop at 1.3050. It expects the ECB's main refinancing rate to be cut to 0.5% by the end of 1Q, undermining the currency's yield differentials that have been a source of support. The bank also expects coercive restructuring by Greece this...." (Dow Jones via FX Street, 1/10/2011)

7) Goldman's Stolper Speaks, Sees EUR Downside To 1.20: Time To Go All In? (Zero Hedge)

8) January Forex Effect — EURUSD headed to 1.0800 (PeterBrandt)

9) The Nightmarish Decline of the Euro Has Begun: Capital Economics sees 1.10 (Economic Collapse Blog)