EUR/USD Heading Towards Parity, Says Natixis

The EUR/USD is on its way to parity, in the view of analyst Nordine Naam of Natixis. Earlier today the currency pair hit fresh lows below 1.06. The analyst believes the spread between the 2-year rate in the US and in most countries will continue to widen, to the benefit of the US dollar.

Naam explained, "The euro’s downturn has accelerated in recent months, ever since the European Central Bank (ECB) first mentioned in Q4 2014 the possibility of an expanded asset purchase programme to address the risk of a deflationary spiral. Since the start of 2015, the EUR/USD has corrected by more than 10% after the ECB announced a more aggressive asset purchase programme, with plans to buy EUR 1,100bn of securities out to September 2016."

"The impact of the ECB QE does not appear to have been fully factored in by the markets judging from the sharp rise of the European bond markets since the Public Sector Purchase Programme (PSPP) kicked off on Monday. There are still many uncertainties over the behaviour of investors in the face of negative yields. However, it seems likely that resident investors will retain much of their bond holdings, whereas non-resident investors should be more inclined to sell their bond holdings to the ECB, leading to an increase in capital outflows from the Eurozone," continued the analyst.

Naam added, "Also, the euro is becoming the borrowing currency of choice in international bond markets. Many global firms are already taking advantage of the low interest rates in the Eurozone to issue euro-denominated bonds, as done recently by Warren Buffet’s Berkshire Hathaway, which has raised EUR 3bn. Compared with other leading currencies (US dollar, Japanese yen and sterling), it is the euro for which interest rates are lowest, meaning that the single currency is also the currency of choice for carry trade strategies. Furthermore, for capital inflows into the Eurozone, channelled chiefly into European equities, the currency risk tends to be hedged, so that upside linked to purchases of European equities by non resident investors is limited. Finally, the euro remains under pressure because of nagging uncertainties over Greece in the absence of reforms. In this context, there could be significant capital outflows over coming months, which would weigh on the euro."

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