The Thanksgiving weekend is just 3 days away, I should be sending you Turkey Roast tips but instead I found EUR/USD Parity talks all cooked up and ready to be served in the markets. In the beginning of 2015, I planned a week holiday with my girlfriend for her birthday on 26th January. That trip never happened as i had to cancel because EUR/USD has fallen down from 1.21 to 1.16 levels in a really short span of time and that is where the parity calls started. Now, I wish I could tell you more about post cancellation of my trip but it’s very painful and i mean literally PAINFUL.
Well, months passed and eur/usd marked a low of 1.0459 running towards parity. But the circumstances changed and the discussion smoked out only to come back now. The Pundits have ignited up the topic again after Fed showed a green card to rate hike before Christmas. And just to add some cranberry sauce over the turkey, ECB is on its way to expand the Asset Purchase Program and perhaps lowering the deposit rate by 25 bps to negative 0.50 on 3rd December, 2015. So, If I was Eur/Usd then I could agree with the fact that I was being pushed from behind and pulled from front falling to parity. This is what everyone is calling the Divergence of policies between Fed and ECB.
Well, Goldman Sachs, Nomura, Lloyd and several others have given confident statements about euro hitting parity in the first half of 2016. Goldman Sachs has even forecasted the fall of euro in 3 steps from ECB stimulus on 3rd December to Fed Rate Hike on 16th December, 2015.
There was no divergence between the policies of two biggest central banks before. Nomura didn’t predict Parity before but they did few days ago.
Historical Price Level
If you see the above chart, during 2002 and 2003, Eur/Usd was at similar levels. Mario Draghi in last ECB meeting already quoted to do whatever it takes to get the Inflation target.
If you guys remember, Draghi took his own sweet time to do easing which means the expansion of QE will take place at a faster pace. Also, there is good 70% chance of Fed to increase rates after an extraordinary Non-Farm data and jobless rate.
Comments from the Joker
I don’t want to be the one to spoil the party and tell you that Parity is far off. But i think that Euro is more of zombie walking rather than running towards parity. In spite of the fact, that investors have embraced dollar, it looks more of a stronger dollar than a weaker euro. We cannot deny the fact, that there has been a global easing going on. Take a look around, the Chinese, Britons, Japanese, Europeans every major economy has asset purchase going on.
So far, our standard view on parity is determined only by tracking Eur/Usd. We have to see the movement of euro against yen, gbp and other Asian currencies because there are so many emerging market economies which are heading towards recession. Japan latest GDP figures have already shrunk. EUR/TWI or the euro trade weighted index has been moderately low. The index shows the average exchange rate of Euro with the major trading currencies. So, if the fall in the index is moderate than it means it would take more for euro to hit parity than the divergence.
Lastly, now when fed is ready to lift off after 10 years, the pace of the rate hike and the number of basis points by which Fed hikes rates should be observed. In last FOMC minutes, fed already stated that the rate hike will be gradual. Also, any reluctance to increase the Monthly Asset Purchase by ECB can give euro a breakout towards the upside.
Will Super Mario save the princess on 3rd December?
Will Fed raise rates on 16th December?
Will Euro hit parity after 16 years?
Will my Turkey taste good? or we can drop this one…. but for the rest of the answers.
There is only one way…. Follow the TRADE JOKER
Sources and References: The Financial Times, The Globe and Mail, The Telegraph, The New York Times, Nationalave.com , Forbes, Business World,CNN, Asia one,The Wall Street Journal, World Economy, The guardian, The Washington Post
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