EUR/USD: 3 key drivers, parity is only a matter of time (Merrill Lynch)

"We see 3 key drivers for the euro. First, monetary divergence. October's very dovish press conference persuaded the market that something big will be announced in December. We anticipate an expansion of QE and a lower deposit rate is also possible. If the FED is also acts in December by hiking its rates, the EUR/USD will be much lower at the end of the year than current levels.

Second, emerging markets. They have lost substantial foreign exchange reserves this year. This should have been negative for the euro based on historical correlations. This correlation has disappeared but this could be temporary. Our analysis still foresees more trouble for the assets of emerging countries when the Fed will take action. Global foreign exchange reserves in euros have risen back to pre-crisis levels, suggesting that emerging countries will have to buy the dollar in the coming months.

Third, the balance of payments. The demand for European assets turned negative this year, reducing the surplus in the current account. If this continues, this trend could turn negative for the euro.

We expect parity. We still need for the EUR/USD to fall to 1.05 by the year's end to target parity by the end of Q1 2016. This will require the ECB to not disappoint us and the FED to act in December.