U.S. dollar is latest market puzzling Wall Street

Published Wed, Apr 27 201612:03 PM EDTUpdated Wed, Apr 27 20165:08 PM EDT

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Widely diverging forecasts on the direction of the U.S. dollar adds currencies to the growing list of assets that Wall Street seems to have no consensus on for their direction. As the S & P 500 nears a record high, only 38 percent of investors are bullish on stocks, according to the latest Barron's Big Money poll . The yield on the 10-year Treasury looks like a ping pong ball this year. WTI oil is back above $40 a barrel, but most energy traders believe the bottom may not be in yet. And now this week, the direction of the euro-dollar rate came into question. Firms such as UBS expect the currency cross to edge up to $1.16 in the next 12 months, while Barclays estimates the euro to fall to 99 U.S. cents against the dollar in the first quarter of next year. "Whenever you see a diverging view it means the trend is about to change. Everyone is no longer in agreement means something definitely has changed," said Bryce Doty, senior fixed income manager at Sit Investment Associates. Divergent monetary policy, with the Fed tightening and the ECB easing, has driven the currency trade in the last two years. Now strategists point to multiple reasons for their differing views on the direction of currencies. "We continue to expect euro-dollar going down but the story is very different from maybe the reasons we were expecting last year," said Andres Jaime Martinez, FX and rates strategist at Barclays. "Last year (it was) widening of monetary policy conditions. This time around we think monetary policy divergence, it will play an important role but not as much as it did last year." The forecast for euro depreciation "has to do with spillover effects coming from the U.K. referendum, even if it's a 'remain' vote," Martinez said. He noted the attention on factions within the European Union would raise concerns about the strength of the common currency. Read More If the Fed is hawkish, here's what might happen On the other hand, UBS Wealth Management expects only short-term pressure on the euro from the U.K.'s June referendum and ECB easing. "Beyond six months, however, economic momentum should allow inflation expectations and real interest rates to rise from current levels, which should lead to further modest EURUSD appreciation, even if the Fed has resumed its tightening by then," UBS Wealth Management strategists Thomas Flury and Brian Nick said in a Monday note. The euro may very well stay on the sidelines as the greater uncertainty for the market is the yen. All eyes will be on the U.S. dollar and the Japanese currency in the next 24 hours with the Fed's statement due Wednesday afternoon and the Bank of Japan monetary policy decision due ahead of Thursday's U.S. market open. Many were caught on the wrong side of the euro trade in December when European Central Bank President Mario Draghi disappointed by not increasing the amount of asset purchases. The euro rose against the U.S. dollar, and the long U.S. dollar trade took a further beating when the Fed in March lowered its projections for the number of hikes this year to two from four. The one area analysts agree on is the very near-term direction of euro-dollar: slightly lower. Both UBS and Barclays forecast $1.10 in three months, while Bank of America Merrill Lynch, which sees parity by next year, estimates $1.08 in June. The euro was trading near $1.13 on Wednesday, remaining in the narrow range it's held since the ECB's March meeting. We'll "probably see the euro-dollar strengthening a little from here (but) parity is certainly a long way off now. People are coming to the realization if you have the ECB more focused on the balance sheet and the Fed … not as hawkish as folks thought they would be (that will) keep us around these levels," said Phil Camporeale, global asset allocation strategist at JPMorgan Asset Management. "I think to really bet on parity you'd have to be a lot more aggressive on the Fed side of the equation," Camporeale said, noting he expects the euro to hold in a range between $1.05 and $1.15 with less volatility than in the last several months. But beyond June, when the U.K. votes on whether or not to stay in the European Union and when the Fed could raise rates, Wall Street is divided on the direction of the euro-dollar. For a market possibly in danger of reeling from significant mispricing, the lack of clarity may hint at growing skepticism on the effectiveness of central banks. Short positions in the U.S. dollar index by leveraged funds, which includes hedge funds, are now double what they were in early January, according to last week's CFTC's Commitments of Traders report. Long positions have come off a peak in February to near levels seen at the start of the year.

Euro and dollar notes

Kiyoshi Ota | Bloomberg | Getty Images

Widely diverging forecasts on the direction of the U.S. dollar adds currencies to the growing list of assets that Wall Street seems to have no consensus on for their direction.

As the S&P 500 nears a record high, only 38 percent of investors are bullish on stocks, according to the latest Barron's Big Money poll. The yield on the 10-year Treasury looks like a ping pong ball this year. WTI oil is back above $40 a barrel, but most energy traders believe the bottom may not be in yet.

And now this week, the direction of the euro-dollar rate came into question.