Westpac - We are predisposed to selling EUR/USD on strength

Westpac - "EUR/USD seemed to satisfy the consensus early in the new year, settling into a low intensity decay from 1.38 to sub-1.35 in Jan. However, price action in Feb has seen those losses completely unwound. There are four key near term (inter-related) themes for EUR/USD: 1) the complexion of the US data; 2) the complexion of the Eurozone data; 3) the prospects for ECB easing; and 4) developments in the periphery. We assess that on balance the positives outweigh the negatives. We quantify these forces with a simple fair value model and find EUR/USD equilibrium has jumped 1.2% in the last 2 weeks, the biggest 2 week rise in more than 6 months.

We are predisposed to selling EUR/USD on strength since medium term headwinds holding back the US (fiscal policy and private sector deleveraging) seem less potent than in the Eurozone. However, in the short term the aforementioned factors seem more likely to evolve in favour of yet higher EUR levels. We could see a run at the late 2013 1.3895 highs before all is said and done. 1.40 may not be an impossible target. However, at these levels we would consider EUR/USD overdone and would establish shorts."

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