Mizuho has revised down its EUR/USD forecast to $1.11 from $1.1350, citing what the bank sees as a persistent overvaluation of the euro against a backdrop of interest rate differentials between the United States and Europe.
The euro was trading 0.3% lower on Wednesday at $1.1338, positioning the currency just underneath Mizuho's earlier target level.
Mizuho's assessment
Jordan Rochester, head of FICC strategy EMEA at Mizuho, told clients the euro has been "overvalued for quite some time versus rates spreads (both nominal and real) for a guide - suggesting levels closer to 1.08-1.10."
Rochester highlighted two factors supporting dollar strength. First, a selloff in technology stocks has lifted demand for safe-haven assets, increasing bid for the dollar, he wrote in a note. Second, U.S. real yields are pointing to stronger dollar valuations relative to other currencies, he added.
Positioning and trades
Alongside the lowered EUR/USD price objective, Mizuho established a new short position in the euro versus the yen. The bank set a EUR/JPY target of 178 from roughly 183.40.
Mizuho cited the potential for official intervention by Japanese authorities to support the yen and the currency's improving valuation against the dollar as rationales for the EUR/JPY trade.
Market context and implications
The bank's guidance points to continued pressure on the euro if rate differentials and U.S. real yields remain supportive of the dollar. The note links recent moves in equity markets, specifically technology stocks, to broader flows into perceived safe-haven currencies.
Investors and market participants will be watching the interplay between sovereign bond yields, equity-sector dynamics, and any signaling or action from Japanese authorities regarding the yen.
Key points
- Mizuho trimmed its EUR/USD target to $1.11 from $1.1350, citing overvaluation versus rate spreads.
- The euro was down 0.3% at $1.1338, just under the bank's previous target.
- Mizuho opened a new euro short against the yen, targeting 178 from about 183.40, citing possible Japanese intervention and improved yen valuation versus the dollar.
Risks and uncertainties
- Official intervention by Japanese authorities to support the yen could alter EUR/JPY dynamics and affect FX positioning.
- Further volatility in technology stocks could amplify safe-haven flows into the dollar, changing currency valuations.
- Movements in U.S. real yields relative to other currencies remain a source of uncertainty for FX valuations.