EUR: Too strong for comfort? - Rabobank

In view of Jane Foley, Senior FX Strategist at Rabobank, it was more of a surprise that ECB President Draghi did not allude to EUR strength during the press conference that followed the July 20 policy meeting and this would have opened Draghi up to accusations of verbal intervention. 

Key Quotes

“This allegation is less likely to stick given that the discussions about the EUR were only made public with the minutes.  After all, the Governing Council have a justified responsibility to discuss all factors which have a bearing on monetary conditions.”

“Draghi’s next major outing will be at the Fed’s Jackson Hole symposium on August 24-26.  Yesterday, however, newswires suggested that he would not be providing policy direction in his speech.  This will not stop investors from watching for any clues as to when the ECB may make any announcement about tapering of its QE programme.  The market will also be watching for any further push back against EUR strength.  That said, given the ECB’s pledge not to give direction about the EUR and given the commitment of G7 nations not to involve themselves in FX intervention (verbal or otherwise), the market could be disappointed.”

“In view of the ECB’s concerns about an overshoot in the EUR, the corrective activity in EUR/USD this month is likely to have been greeted with relief.  As we have stressed before, the ECB’s concerns may be more about the pace of the gains in the EUR and less about its actual level.  Despite its climb this year, EUR/USD remains undervalued on many measures.  According to the OCED’s forecast for Purchasing Power Parity, fair value is currently positioned at EUR/USD1.33.”

“Despite the high around EUR/USD1.1910 in early August, we have maintained a 1 and 3 mth forecast for EUR/USD at 1.17.  This forecast is based around our discomfort with the pace of the rally in EUR/USD particularly in the late Jun to July period.  We see scope that position adjustment and concerns about the EUR’s bearing on any ECB policy announcement could inhibit further EUR gains in the weeks ahead.  That said, we remain essentially EUR bulls.  In terms of the trend that has been in place since the spring, EUR/USD could correct back towards the 1.16 area, while leaving this uptrend intact.  Given the relative improvement in EUR fundamentals compared with the USD this year we would expect to see solid buying interest on any downticks in EUR/USD and we forecast a rise to 1.20 on a 12 month view.”

“This year’s rotation back into the EUR has been built around an improvement in the Eurozone economic and political backdrop.  However, it has been fuelled by a widespread reduction in long USD positions.  Disappointment about US reflation and disarray in the White House have enhanced the relative attraction of the EUR to the extent that a discussion around its safe haven credentials has opened up.  In terms of what defines a safe haven, the EUR has one significant advantage over the USD.  This is the Eurozone’s huge current account surplus.  We would still argue that the Eurozone debt crisis is too close for the EUR to have the credibility of a true safe haven.  However, we see the current account surplus as being a key factor in this year’s march back into EUR assets.  Given that EUR fundamentals are already looking relatively attractive, if the crisis between N.Korea and the US worsens again, Europe’s geographical position could give further appeal to the EUR.”