2018 was a tough year for the EUR/USD exchange rate. After a false start in January, the euro fell from its high of 1.25 versus the dollar to 1.14 by year end. The pair had to contend with a number of pressures including an up-rating of the market’s expectations around US monetary policy, US-centric trade …read more
• The euro has been very strong this year (appreciating over 10% YtD against the dollar)
• Fair value (measured using PPP) is 1.33, suggesting the EURUSD pair is still around 15% undervalued
• In this blog post we use a FEER (Fundamental Equilibrium Exchange Rate) framework to investigate what level exchange rate is consistent with a sustainable balance of payments. Our results are broadly consistent with PPP valuations, and suggest that there is a risk of further euro appreciation to come
Since the US presidential election on November 9th, markets generally have welcomed the more conciliatory tone from the President-elect Donald Trump. How have currency markets reacted, how might the changing economic environment affect hedging decisions, and what does this mean for currency returns?
Are currency markets stuck in a period of short-term mean reversion? If so, what’s driving this and what are the implications for investors?
• The initial details of the bail-out suggest that over the next three years, Greece’s hard-line creditors could be largely ‘paid-off’, leaving the door open to debt renegotiation further down the line.
• While Greece is required to make further sacrifices in the form of asset privatization, the deal postpones economic and humanitarian consequences of Euro exit.
• As always, there are significant uncertainties surrounding long run feasibility including primary surplus and asset sale revenue assumptions.
• The perceived direct financial cost of a Grexit for Germany is ultimately not the real cost.
• Both in terms of enhanced current account dynamics and via substantial cost savings for the sovereign issuer, there has been a direct benefit which we put in the order half a trillion Euros (conservative estimate) for Germany alone.
• Courtesy of the ECB we have allowed a costless exit route to any middle class and wealthy Greeks to park their money elsewhere in the Eurozone, free of charge, with full protection.
• There is no formal mechanism to prevent this circular flow of Euros short of the ECB putting a maximum limit on ELA financing to the Bank of Greece and thus setting the pre-conditions for the erection of capital controls in Greece.