© Marc Spaelti
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We have seen that the Euro moved back higher quite a bit over the last two months or so. The common currency has come from around 1.27 at the beginning of November and has gone up by 7-8% to 1.36. However, now we see that the Euro is doing a bit of correction. I think the movement up is justified on the back that last year it was all about negative Euro news; however, the politicians, but mainly the ECB, have been able to restore some confidence in the Euro area. As a result, it has made the Euro gain value against the U.S. Dollar, where the economy is also not so bright. Thus, to my mind the movement up is completely justified.
What is your estimate of EUR/USD fair value?
It is such a tricky question. First of all, we have to decide what the fair value is, and is it Purchasing Power Parity-based? Of course, that value can be applied, but already 20 or 30 years ago it was recognized that, while this can be used, it is not such a great measure, because markets go over or under quite a bit from the PPP. In addition to that, the living standards are not always equal over time. Thus, it is really very difficult to say what the fair value is. I think another problem is that exchange rate is a bit too abstract. If I say that the movement from 1.27 to 1.36 is justified, it is said on the back of that now it seems that situation in the Eurozone has somewhat stabilized compared to what was going on last year, when the Euro was traded around 1.27 level.
Whether the fair value for EUR/USD is at 1.30, 1.20, 1.10, 1.00 or even at 2, I cannot judge that and I do not think anybody can actually, because exchange rate is more an evolution in time than the fact that EUR/USD fair value should be at 1.40 because a loaf of bread should cost the same everywhere.
Recently, French President Francois Hollande and ECB President Mario Draghi expressed their worries over recent Euro gains that may slow inflation and growth, damping demand for the region's assets. Do you also think it is the time to start panic about current Euro level assuming that it might derail Europe's recovery?
In my opinion, there should be no panic, since the Euro's upward movement has only been 7% against the greenback and the Eurozone's currency has not been at a level that we have not seen in the last 10 years. I mean the shared currency is at the level where it was last time about 2 years ago. In fact, at that time the Euro had come from the higher levels. The currency was closer to 1.40 in April 2011 and before that it had already moved from 1.50 down to 1.20 and back up to 1.50 from 2008 to 2011. Today's level, if we look at the long-term chart, is absolutely in a range of the last 10 years, I believe. Thus, no panic at this level is necessary; at least it should not be considered a problem against the U.S. Dollar.
I think the European officials are more talking about the third large currency, which is the Japanese Yen. If we look at EUR/JPY, the movement has been 25% over quite a short time span. In August the Euro was trading at 95, and this month it has reached 125, making up a 31% movement. Yes, that is a serious problem, because Asia is an important exporting partner for Germany and for the whole Euro region. The way that the Japanese Yen has lost its value in recent weeks makes it absolutely clear that Japan has been pumping in even more cash compared to the Euro area and the U.S. Japan has actually been winning in the currency war games, although, at the moment everyone is trying to do the same thing: the Swiss have started almost 2 years ago, the U.S. and Europe have been pumping in liquidity for years. Japan has also done so, but they stepped up the level to go even much more. Hence, I think EUR/JPY is what worries the ECB and the Germans the most.
What is your short term and long term forecast for EUR/USD?
I think in the short term the movement we have been seeing since November from 1.27 still will be ongoing. There will be an upward trend, with the Euro moving a bit closer to 1.40. Just over the last two days it has been correcting down a little bit on the ECB, as Mario Draghi expressed his worries over the Euro's rise. I think there will be one more jump up to 1.3850, perhaps even touching 1.40. That would be my view for the next 2-3 weeks. After that we might see some good news coming from the U.S., and if that is the case, the U.S. Dollar could probably strengthen again, reversing this movement and plummeting back to 1.27.