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PIG TODAY-This may be the one currency call Trump’s administration got right

The Trump administration sparked fears of global currency wars after calling the euro “grossly undervalued,” but maybe that notion isn’t so off base, strategists say.

In a new report out on Wednesday, Bank of America Merrill Lynch calls the shared currency EURUSD, +0.2264%  “undervalued” and particularly when comparing the currency against the dollar. Using a model that takes into account interest rates, public finances and purchasing power, among other factors, the bank found that the euro is trading at a 9.6% discount to the greenback.

Athanasios Vamvakidis, head of Global G-10 Foreign Exchange Strategy at B. of A., explained that there are two reasons the euro currently is so-called underappreciated. For one, investors tend to flock to the dollar on expectations President Trump will roll out a big fiscal stimulus package; and secondly, the European Central Bank is maintaining its aggressive monetary-easing program, which can have the knock-on effect of making the dollar and dollar-pegged assets a compelling investment.

“In the short term exchange rates can deviate from equilibrium estimates because of differences in central bank policies and differences in business cycle. For example, the U.S. economy is at full employment, so if you add fiscal stimulus, it is expected that the dollar would be above its long-term equilibrium,” he told MarketWatch.

The euro relative to other G-10 currencies

The euro was thrown into the limelight late in January, when Trump’ trade adviser Peter Navarro accused Germany of exploiting the U.S. and other EU countries by dealing in a currency that is “grossly undervalued.” As a major global exporter, Germany reaps the benefit of a weak currency as it makes their products cheaper for other currency holders.

Navarro’s comments didn’t sit so well in Berlin, where Chancellor Angela Merkel rebuffed any speculation her country was seeking to influence the euro’s exchange rate.

But even amid Navarro’s euro bashing, the shared currency could take another step lower in coming months, according to Vamvakidis.

“In the short term we believe that there is further downside for the euro because we expect the new U.S. administration to roll out fiscal stimulus. And also we believe the market will get concerned with political risks in Europe,” he said.

“But in the second hand of the year, the euro is likely to start strengthening, particularly as we expect the ECB to announce QE tapering by the end of the year.”

Source: marketwatch.com

The Trump administration sparked fears of global currency wars after calling the euro “grossly undervalued,” but maybe that notion isn’t so off base, strategists say.

In a new report out on Wednesday, Bank of America Merrill Lynch calls the shared currency EURUSD, +0.2264%  “undervalued” and particularly when comparing the currency against the dollar. Using a model that takes into account interest rates, public finances and purchasing power, among other factors, the bank found that the euro is trading at a 9.6% discount to the greenback.

Athanasios Vamvakidis, head of Global G-10 Foreign Exchange Strategy at B. of A., explained that there are two reasons the euro currently is so-called underappreciated. For one, investors tend to flock to the dollar on expectations President Trump will roll out a big fiscal stimulus package; and secondly, the European Central Bank is maintaining its aggressive monetary-easing program, which can have the knock-on effect of making the dollar and dollar-pegged assets a compelling investment.

“In the short term exchange rates can deviate from equilibrium estimates because of differences in central bank policies and differences in business cycle. For example, the U.S. economy is at full employment, so if you add fiscal stimulus, it is expected that the dollar would be above its long-term equilibrium,” he told MarketWatch.

The euro relative to other G-10 currencies

The euro was thrown into the limelight late in January, when Trump’ trade adviser Peter Navarro accused Germany of exploiting the U.S. and other EU countries by dealing in a currency that is “grossly undervalued.” As a major global exporter, Germany reaps the benefit of a weak currency as it makes their products cheaper for other currency holders.

Navarro’s comments didn’t sit so well in Berlin, where Chancellor Angela Merkel rebuffed any speculation her country was seeking to influence the euro’s exchange rate.

But even amid Navarro’s euro bashing, the shared currency could take another step lower in coming months, according to Vamvakidis.

“In the short term we believe that there is further downside for the euro because we expect the new U.S. administration to roll out fiscal stimulus. And also we believe the market will get concerned with political risks in Europe,” he said.

“But in the second hand of the year, the euro is likely to start strengthening, particularly as we expect the ECB to announce QE tapering by the end of the year.”

Source: marketwatch.com

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