Don’t Buy The EUR

EUR/USD is off the post-Draghi backfire highs but doesn’t easily fall off the 1.11 handle. The team at Credit Agricole does not like euro shorts:

Here is their view, courtesy of eFXnews:

Risk sentiment was stable in Asian hours, irrespective of weaker than expected industrial production and retail sales data out of China. It appears that last week’s ECB monetary policy announcement finally made a case of rising appetite for risk assets. Even if ECB President Draghi indicated that the deposit rate is unlikely to fall further from the current levels, it must still be noted that additional quantitative easing and more funding via LTRO proves beneficial to investors’ liquidity expectations. Due to its eroded rate advantage the EUR should remain a funding currency of choice and that is likely to keep it closely and negatively correlated with risk appetite.

Even if central banks such as the BoJ and SNB are unlikely to consider additional policy action as soon as this week, it cannot be excluded that a gradual trend of improving sentiment will stay intact. This may be partly on the back of improving US growth conditions too.

In that respect this week’s US retail sales and Fed rate announcement will be key. Although the Fed is likely to make a case of further rising Fed rate expectations to the benefit of the greenback, the central bank should spread confidence in the US recovery too. From that angle rising growth expectations should compensate for more supported rate expectation’s dampening impact on sentiment. As a result to the above outlined conditions we believe the USD should still be bought on dips, for instance against the EUR.