BNP look for EUR/USD to fall

The latest from BNP (note from BNP Paribas currency strategist Dan Katzive) says:

• EUR/USD decoupled from rate differentials in early 2014 after tracking “reliably” for most of 2013
• The breakdown in correlation followed heavy reserve accumulation by EM central banks in the fall of 2013 and “coincided with suspected heavy intervention by China’ central bank in January”
• Previous episodes of large reserve diversification have “sometimes been associated with breakdown of correlation between EUR/USD and rate differentials”
• China reserve flows tend to outweigh those of other EM countries, and data suggests bulk of China’s reserve accumulation may have occurred in Jan./Feb. and may slow to near zero as 2Q starts

Katzive says the shift may have been driven by reserve diversification and EUR may be “vulnerable” if diversification slows