EUR still not overvalued – Rabobank

Jane Foley, Senior FX Strategist at Rabobank suggests that while it is not surprising that the pace of the move in EUR/USD this year has triggered concerns within the ECB’s Governing Council, the EUR remains undervalued on many measures. 

Key Quotes

“According to the OECD’s measure of Purchasing Power Parity fair value, the EUR is currently over 11% undervalued against the USD.  Earlier in the week the release of a -0.7% m/m drop in July German factory orders surprised the market.  However, this is a volatile series and the weakness in this data was the result of a sharp fall in domestic orders.  By comparison export orders remained flat suggesting that firms are coping with EUR strength.  Adjusted for working day, German July factory orders rose at stalwart 5.0% y/y which provides a good snapshot of the strength of the economy.”  

“Although ECB watchers will be switching their attention towards the measures that may be announced in October regarding the ECB’s QE programme, the FX market is likely to start focussing on the September 20 FOMC meeting.  Earlier this week Minneapolis Fed President and uber-dove Kashkari warned that the Fed’s rate hikes over the past 18 months may be “doing real harm” to the US economy resulting in “lower wage growth, and leading to lower inflation and inflation expectations”.”

“The Fed’s Brainard took a more pragmatic approach commenting that the Fed should be cautious about further tightening given its “persistent failure” to hit its 2% inflation target.  Amid the dovish rhetoric from Fed officials and the raft of global geopolitical and US related weather events, the yield on 10 year notes has this week touched their lowest level since last November providing further downward drag for the USD.  We expect EUR/USD to hold around current levels in the weeks ahead and move to the 1.25 area by the middle of next year.”