Euro exchange rate has been overvalued, this is a necessary adjustment say UniCredit

Friday, 16 December 2011

Euro exchange rate has been overvalued, this is a necessary adjustment say UniCredit

Analysts say that because bank repatriation flows have ended the euro is forecasted to find little support.

The euro dollar exchange rate (EURUSD) is 0.32% higher at 1.3059.

The euro pound exchange rate (EURGBP) is 0.1% lower at 0.8399.

Unicredit say they see further euro weakness as the robustness we have seen during much of 2011 – driven by banks’ repatriation of assets – comes to an end.

"After 5-7 difficult years, the overvaluation of the euro finally seems to be over – and if followed by a period of undervaluation, then that should be good for growth, compared with our base-case scenario," say analysts.

The issue of further ECB monetary easing will be a dominant topic in the new year and will have a key role to play in determining the value of the euro exchange rate.

While a number of research institutions we follow believe there will be another rate cut in the new year, UniCredit believe this is unlikely.

They say: "The new ECB macroeconomic forecasts unveiled on 8 December, envisaging substantial downside risks to the growth outlook, indicate that the central bank is more bearish than us and enters 2012 with a clear easing bias.

"However, the decision to cut rates in December was not unanimous, implying that the GC may wait another couple of months before re-assessing the case for further easing. If our baseline scenario of no recession proves correct, by February/March most leading indicators should have started to turn, persuading the ECB that no further downward revision to the GDP/CPI outlook is needed."

Should this forecast prove to be wrong then the euro exchange rate could come under even more pressure than is the banks current base case.

link