DEBATE: Should we be concerned about this year’s sharp appreciation of the euro?
YES – Nick Mitchell, head of Trading and Currency at Killik & Co.
Year to date the euro has appreciated against all but one of its G10 counterparts, by as much as 10 per cent against the US Dollar and around 5 per cent on a trade weighted basis. Yes, political risk in the Eurozone has receded somewhat in recent months (for the time being at least) and yes both economic and inflation data has been improving. But the market has received mixed messages from the ECB. In June, President Mario Draghi effectively called an end to deflation in the Eurozone and at the time was seemingly unperturbed by a stronger currency. Last week’s minutes painted a slightly different picture: concerns have been raised by the governing council regarding a potential exchange rate overshoot. Inflation is not really where the ECB wants it to be at present – a stronger Euro will provide some inflationary headwinds, and there is perhaps a concern that this will dampen, to some extent, the ECB’s ability to begin tapering its QE program – at least in the way the market expects. Watch out for the ECB meeting on 7 September – some volatility may not be too far around the corner.
NO – Florian Hense, European economist at Berenberg Bank.
The Eurozone has done pretty well this year so far. Political risks have receded, the economy has enjoyed a stronger-than-expected upswing and the outlook remains encouraging. No wonder that markets have picked up on that. The stronger euro is the consequence of success. Certainly, the euro’s appreciation of c5 per cent versus a trade-weighted basket of currencies this year bites into Eurozone exports. But, so far, stronger foreign demand seems to have offset what the appreciated euro costs the Eurozone in competitiveness. Also, if the last couple of quarters are any guidance, domestic demand is driving the economy. Only if the euro were to shoot well over $1.20 in the next couple of months and stay there, we may start to be concerned. After all, the trend is as important as the level of the exchange rate. But the trend does not point to a sustained appreciation. The euro has stabilised recently. Goldilocks has made the Eurozone her new home. She will stay for the time being.