The euro has been tumbling down due to various reasons. The team at SocGen seen parity on the way, and they explain:
Here is their view, courtesy of eFXnews:
There’s an excuse (to plot the Euro/USD PPP (from the OECD) against the spot rate. On this measure, the Euro’s less undervalued than it was in 2001, and a lot less undervalued than it was overvalued in 2008. The German undervaluation is as irrelevant in a single currency system as pondering what the ‘London Pound’ ought to be valued at. But a country (or currency area) with a huge current account surplus really can’t sustain a currency level far below PPP for long. Breaking lower than the 2001 level in adjusted terms (which is around parity for WEUR/USD) is only conceivable on the back of huge political stress. Of course, that may happen as the French presidential election kicks into gear.
We expect EUR/USD to reach the low for the year sometime in the next three months, during that campaign, at a level close to parity. If Marine Le Pen doesn’t win the election, we expect a very significant Euro rebound through H2 as valuations and capital flows dominate. But with M Fillon showing no signs of leaving the fray, M Bayrou still lurking in the shadows, and M Hamon still making overtures to M Melenchon, the only candidate confident of making it to the second round is “Marine”.
The UK Article 50 debate continues in parliament. The pound continues to meander lower. I’ve added a PPP chart of GBP/USD for fun, with a longer history because I can. The pound really was very undervalued in the 1970s when UK politics was last as silly as it is now. Perhaps the interesting thing to note about the OECD PPP calculations (with all the necessary caveats) is that the pound is overvalued against the euro at current levels. One the all the political dust settles, EUR/GBP is a buy.
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