EUR: Bad for exports? - Rabobank

The recent release of weak Eurozone data underpin the question as to whether this year’s better tone in the EUR is set to take a toll on Eurozone exports and growth potential going forward, in view of Jane Foley, Senior FX Strategist at Rabobank.

Key Quotes

“This morning’s release of weaker than expected German April factory orders data fell by a faster than expected -2.1% m/m.  The main reason for the weakness appears to be weakening demand from abroad.  Foreign orders plunged by -3.4 m/m on the back of a -4.8% dive in non-Eurozone orders.  This is consistent with recent data from China which shows a slowdown in imports of German goods – albeit after a spike earlier in the year.  It could be premature to draw too many conclusions from this morning release, after all German factory orders data can be volatile.    However, inevitably these data underpin the question as to whether this year’s better tone in the EUR is set to take a toll on Eurozone exports and growth potential going forward.”  

“According to the BoE’s calculations, the Eurozone effective exchange rate in recent sessions has been hovering at its strongest level since January 2015.  Measured from its levels at the start of the year, the index has climbed by 4.1%.  This year’s gains extend an improving trend for the Eurozone effective exchange rate which has been in place since March 2015.  This performance, however, masks the fact that the EUR remains undervalued on many measures.”

“According to the OECD’s calculations, fair value for EUR/USD as defined by Purchasing Power Parity (PPP) currently lies at 1.34.  Not all methods suggest that fair value is quite so high.  However, the Bloomberg calculated PPPs based on CPI inflation, PPI inflation and the Big Mac method all suggest that EUR/USD is currently between 0.02% and 18.5% undervalued.”

“More specifically, the recent gains in the Eurozone effective exchange rate disguise the fact that Germany’s effective exchange rate has been notably soft since the start of EMU in 1999.  Without doubt the adoption of the EUR provided German exporters with a significant boon.”

“Notwithstanding the fact that German exporters are still benefitting from a soft exchange rate, a slowdown in growth in overseas markets is still likely to have an impact on export volumes.”

“Looking forward Trump’s protectionist position and his clear unease about the size of the US’s trade deficit with Germany could provide some bumps in the road.  In addition, the UK economy has already slowed from 0.7% q/q in Q4 to 0.2% q/q in Q1 and falling real wages suggest that further headwinds are in store for UK consumers.  Brexit also raises concerns for Germany’s exporters.  On top of that fears that the debt mountain could result in slower Chinese growth going forward will also be a worry for Germany exporters.”

“The tightening in monetary conditions implied by a stronger exchange rate supports our view that the ECB will maintain a cautious policy outlook for now.  Although we expect the ECB to change its risk assessment to ‘broadly balanced’ at its policy meeting tomorrow, we do not foresee a change in its forward guidance.  Although the ECB may taper its QE programme next year we foresee no hike in the deposit rate for some time.  A dovish tone from the ECB tomorrow is likely to disappoint the EUR bulls.  That said, given our outlook for a soggy USD we see EUR/USD rising towards 1.17 on a 12 mth view.”