Deutsche Bank: Time to re-enter short EUR/USD

EUR/USD has undergone a painful squeeze over the last few weeks. We do not 
think this has much more to run and believe these are good levels to re-enter 
First, history suggests that counter- moves in dollar trends rarely go beyond 
the current correction. Of the ten largest dollar moves in history, all but one 
have witnessed a squeeze greater than 10% (chart 1). The current 9% 
correction is very close to historical experience, suggesting we should be at (or 
very close to) the end of the squeeze. 
Second, positioning is much cleaner. FX trading volumes rose during the last 
two weeks’ EUR/USD rally (see DBFX volume report to be published this 
week), while the beta of an index of FX fund manager returns to the dollar has 
already reverted to its medium-term average (chart 2). IMM data, though 
lagged, also show ongoing position reduction.

Third, the risks are skewed to a renewed turn of relative growth and monetary 
policy expectations in favour of the USD. EU-US data surprises are at extremes 
in favour of Europe and have already started to turn (chart 3, see other page). 
In turn, the market is now pricing both the first Fed rate hike and the end of 
ECB QE by December 2015, which seems too dovish and hawkish 
respectively. The next move in EU-US rate differentials is therefore likely to be 
down, not up (chart 4). 
In sum, our EUR/USD forecast of parity by year-end remains unchanged and 
we believe these are good levels to re-enter EUR/USD shorts.

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