Euro: Slow down, you move too fast – SocGen

The biggest barriers to further euro gains in the near term is the speed of its gains so far and the associated long euro positions that have been put on, according to Kit Juckes, Research Analyst at Societe Generale.

Key Quotes

“It’s important to note that the euro is not ‘strong’ at current levels, even if it is stronger in trade-weighted terms than implied by the current level of EUR/USD because GBP has fallen so much.”

“ECB policy normalisation. As European political clouds lifted and the economy recovered, the ECB has indicated that it wants to edge towards an exit from post-GFC policies, tapering asset purchases first and eventually raising rates. The FX market has moved in anticipation of that, but with expectations of Fed tightening being downgraded, the euro’s rise has been faster than the ECB would have desired. So now some transatlantic policy ducks need to get back in order.”

“A pause that refreshes. If it becomes clear that the Fed will continue tightening in the months ahead, then that should help the dollar temporarily and in turn provide breathing space for the ECB from the euro’s advance. This should in turn allow the ECB to maintain progress towards an exit from extraordinary policies. As long as the Fed is on track to tighten, the ECB can follow, and the euro, after a pause, can continue to rise towards long-term fair value both against the dollar and on a trade-weighted basis.”

“Further euro upside. The Big Mac index pegs fair value for EUR/USD at 1.25. The OECD puts PPP at 1.33. We have nothing against splitting the difference, and we look for levels above 1.25 by the end of 2018. We expect to see further upside in both EUR/GBP and EUR/JPY, and even, to the SNB’s pleasure, in EUR/CHF. EUR/SEK and EUR/NOK will probably fall in the months ahead, however, and we expect further downside in EUR/TRY too.”