Euro is pretty cheap
By Vincent-Frédéric Mivelaz
At purchasing power parity, the EUR is worth USD 1.33. Given that the current traded price is around 1.20, we maintain that the EUR is pretty cheap over the long-term.
In the medium-term, we expect it to remain in the 1.20 range – probably into Q2 18. November industrial production data for France and the UK are expected to be strong: they will boost the single currency. Recent gyrations in price have multiple reasons: 1) investors are waiting for a German coalition to form; 2) investors might think the EUR is too strong, thus reducing growth; 3) investors are waiting for the next European Central Bank Monetary Policy Meeting before acting. Whichever, we think the ECB will not tighten rates, especially after yesterday’s November EU report that unemployment is at its lowest rate in almost nine years, at 8.70%.
Waiting for US inflation
By Peter Rosenstreich
2018’s strong start should kick up inflation. Markets expect a rebound of the US Consumer Price Index in December. Higher food prices should offset declines in energy. We expect December’s CPI to increase 0.18% monthly and 2.1% annually. This should support the US Federal Reserve in hiking interest 0.25% for three times in 2018, which in turn should spark USD rallies in March, June and September.
However, the Fed might cautiously decide not to hike rates in June. Disappointing wage growth plays to the Fed’s doves. Our longer-term view for USD remains bearish against higher yielding emerging market currencies.