FXstreet.com (Barcelona) - Based on their studies, JP Morgan analysts say that the Euro should move about 0.75% trade-weighted for every 10bp shift in ECB's monetary policy expectations against its major counterparts: "For example, if the ECB pursued a unilateral easing cycle over the next several months that pushed the policy rate from the current 0.75% to 0.50% or even 0% (an extreme scenario) by the end of 2012, the euro could fall 2%-6% trade-weighted for 25bp and 75bp cuts, respectively", wrote analyst John Normand, pointing however to different sensitivities in the exchange rates.

While the EURNZD, EURUSD and EURJPY (most sensitive) are expected to move 1.5% for every 10bp change in spreads, the EURNOK, EUR/BRL and EUR/MXN (least sensitive) should move only 0.3%.

However, these relationships could morph as the ECB enters uncharted territories, with near-zero policy rates and negative deposit rates. "The unprecedented path of ECB policy may explain the risk premium popping up on any standard valuation model", Normand added, pointing to current levels of EURUSD, EURGBP, EUR/commodity FX, EUR/Latam, EUR/Asia, and EUR/Scandinavia as 3%-5% too low, and a mispricing over 8% in EUR/commodity currencies.

JP Morgan analysts conclude the analysis as cautionary: "We take it as a caution
against extrapolating a trend and proposing extreme forecasts as the baseline", said Normand.
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Forex pairs in this Article » EUR/GBP, EUR/JPY, EUR/NOK, EUR/NZD, EUR/USD

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