The EUR/USD peaks as weight of deflation subsides

 

 

Christopher Vecchio, Currency Analyst at DailyFX, comments:

 

“The EURUSD has streaked back to its late-January highs as the weight of deflation talk has subsided once more. Not surprisingly, the more aggressive dovish commentary in recent weeks has come from France, a country with a declining rate of export growth over the past three-plus years. French exports have fallen from +10.7% y/y in the 3Q’10 to +1.5% in the 4Q’13. A weaker Euro would absolutely help French exporters get a competitive edge. But it’s much easier for policymakers to blame a seemingly crooked exchange rate for the problems than the misguided policy created by their own hands; c’est la vie.

 

“There has to be good reason for the ECB to remain on hold all these months despite the continued downswing in inflationary pressures. Even as export growth in the region has been stunted, a stronger Euro might not be such a bad thing for the Euro-Zone at present time. With unemployment rates, especially among the youth, elevated to at or near all-time highs, inflation would more quickly erode purchasing power from a struggling consumer base. Just like higher taxes and reduced government spending (austerity) can provoke consumers to spend less (simple opportunity cost of what to do with diminishing available capital), more inflation in an environment characterised by a weak labor market and low wage growth could cripple consumption and drive the Euro-Zone back into recession.

 

“Last week, two developments along this front arose: updated inflation expectations from the ECB remain firm towards +1.7% to +2.0% over the medium-term; and the 4Q’13 GDP report was better than expected at +0.5% y/y versus +0.4% y/y expected. The 3Q’13 GDP figure was also revised higher to -0.3% y/y from -0.4% y/y. In support of the ‘a stronger Euro is helping’ argument, consider that on an equal-weighted basis versus the Australian Dollar, the British Pound, the Japanese Yen, and the US Dollar, the Euro gained +1.12% in the 3Q; growth accelerated in the 4Q when the Euro basket gained +4.01%.”

 

 

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