Contrarian euro view lands RBS on top

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Royal Bank of Scotland (RBS) has topped this week’s one-month currency forecast rankings with a prescient view on the short-term rally of the euro on the back of the latest bond-buying programme announced by the European Central Bank (ECB) in early September.

On September 7, the day after the landmark announcement by ECB president Mario Draghi, EUR/USD was trading at 1.2691 and the consensus view of forecasters was that it would fall to 1.24 in a month’s time. But RBS took the view it would rise to 1.27 – in fact, EUR/USD was trading at 1.30 by October 8, according to data from Thomson Reuters.

“We were looking for an ECB policy response relief rally and a squaring of short euro positions. We thought the ECB’s announcement on supporting periphery debt markets would reduce the tail risks around holding euros and that this had the potential to squeeze stretched short euro positioning,” explains Paul Robson, senior foreign exchange strategist at RBS in London.

RBS also took a contrarian view on GBP/USD, forecasting it would rise moderately from 1.59 to 1.60 during September, while the consensus forecast it to fall to 1.57. Sure enough, cable was trading up at 1.61 by October 8. However, Robson is more bearish on both the euro and sterling in the longer term.

We thought the ECB's announcement over supporting periphery debt would reduce the tail risks around holding euros and the positioning was very stretched at that point

“We still maintain a negative view for EUR/USD and GBP/USD over a 12-month horizon because we think recent euro strength is a short-term position move, rather than because the longer-term risks around holding euros have been eradicated or significantly reduced,” says Robson.

RBS expects the euro’s recent rally to continue over the next month, with an additional boost if Spain requests a bail-out, which Robson expects to happen shortly after the European Union summit at the end of this week. The rally of the euro and sterling will come to an end towards year-end, he expects.

On the Swiss franc, RBS forecast USD/CHF would fall from 0.96 to 0.95, with the pair ultimately trading at 0.93 on October 8. “Our forecast for USD/CHF was based on our view that the US dollar could soften during a better risk environment after the ECB policy action. It had been clear for the past couple of months that reserve growth was slowing and, if that was the case, there would be less downward pressure on EUR/CHF,” explains Robson.