Oveurosold – aka is the Euro too cheap?
We are told that one of the more crowded trades is investors and speculators being long US dollars and short euros. With negative yields on over a third of outstanding Eurozone government debt and ten year German government bonds yielding a miserly 0.20%, you can see why the interest rate differential (US ten year Treasuries yield 1.95%) would support the US currency. A weaker euro has been welcomed by many Eurozone countries and sustained by the start of the European Central Bank’s (ECB) quantitative easing (QE) programme – more euros in circulation.
But we already know that one currency doesn’t fit all. While the euro at 1.075 versus the US dollar may suit some of the periphery in the Eurozone, it merely strengthens Germany’s competitive position for its exports, possibly regaining some market share from Japan after its currency fell sharply last year. However currency weakness for the euro against all major currencies has led to a record German current account surplus and the rest of the Eurozone countries (except France!) have also moved into surplus.
As a percentage of Gross Domestic Product (GDP), the surplus represents 7.5%. Contrast that with the UK’s current account deficit announced this morning and it should be easy to spot the difference or mind the gap.
Source: Bank of England
Over the past year, sterling has appreciated against the euro by around 11%, although off its highs in March.
Both the UK and Eurozone have political risks and interest rate differentials favour the UK currency. A good time to holiday in Europe? Quite possibly but over time these current account imbalances tend to have an impact on currencies and right themselves.