EUR/USD: 3 reasons why Deutsche Bank expects parity by the end of 2016

Deutsche Bank continues to expect the EUR/USD to hit parity by the end of the year. They provide 3 reasons:

1- The ECB still has ammunition to ease monetary policy.

2- The current decline in foreign exchange reserves does not matter for the yen because central banks don't hold Japanese assets. However, the euro is the second reserve currency and a decline in foreign exchange reserves in euros in emerging markets requires sales of the EUR/USD. Central banks could sell between 200 and 400 billion euros in 2016.

3- Europe is not like Japan when risk aversion is felt. In this sort of context, the JPY strengthens because Japanese investors repatriate their capital. This risk causes bearish hedges on the euro but the key difference with Japan is that their international investment position is always negative. This means that there are always more foreigners investing in Europe rather than European investors invested abroad. This reduces the positive impact on the euro of capital flows. This supports our hypothesis of capital outflows from Europe. The latest data indicate an exit of €500 billion year-on-year in Q4 2015, a new record.