EUR/USD downtrend should continue: market has yet to re-price the Fed
DANSKE BANK. The EUR is falling like a stone, particularly against the USD. We think this move has further legs.
It appears that rising FX hedge ratios from real money investors into EUR assets are driving this latest move. When European equities rise, real money investors have to sell more EUR to maintain an unchanged FX hedge ratio. This combined with increased lending abroad from European banks resembles what we have seen in Japan in recent years. In our view, the EUR/USD downtrend should continue as long as the market has yet to re-price the Fed and the euro area is still in deflation.