BofA Warns "Further Euro Appreciation Is A Problem"

Tyler Durden's picture


With only 3 of 70 economists surveyed by Bloomberg expecting a rate cut at tomorrow's ECB press conference, Credit Agricole's Frederik Ducorzet suggests seven signals to watch for from Draghi that could signal ECB easing ahead. Crucially, as BofAML puts it, "further euro appreciation is a problem, particularly for the periphery," and with empirical Phillips curves in hand, there is little room for further compensation via wage reduction. In other words, if Draghi stands pat (or doesn't offer up some sacrificial forward guidance hint of easing being likely), the drumbeat of social unrest in the periphery will grow ever louder.


These 7 signals should be watched for carefully, according to Credit Agricole's Frederik Ducrozet, as hints that further ECB easing is on its way...

For ECB refinancing rate cut to be delivered in December, following conditions need to be met:

1. Explicit hint about rate cut discussion if asked whether decision was unanimous


2. Signal may be conditional on Dec. staff forecasts


3. Hint toward likely shift in balance of risks to price stability/reference to FX and oil prices on inflation


4. Keeping deposit rate at zero

Draghi may become more explicit on ECB’s liquidity plans:

5. Explicit reference to LTRO, reduction in reserve requirements or suspension of SMP sterilization may have greatest market impact


6. Market may be disappointed if ECB says it remains attentive to money market conditions without more details


7. Easy solution would be extension of fixed-rate full allotment regime in 2015


Which is crucial, for a s BofAML notes, while the euro is not overvalued, it is close to the upper end of its equilibrium range. Therefore, the euro area can afford a stronger euro, but not a much stronger euro. However, their evidence suggests a much lower euro threshold for the periphery, with little room to compensate with wage reductions.




Our estimates suggest that a further euro appreciation by about 3% in real effective terms would bring the currency to the early stages of an overvalued territory.

Moreover, the strength of the euro this year has already started offsetting the periphery's competitiveness gains, which the region achieved during a painful adjustment in recent years.

The chart above shows equilibrium estimates for the euro area and selective member countries, using the IMF's CGER methodology, which combines a number of equilibrium measures. According to our estimates, the euro is currently overvalued by about 7%.

However, our estimates also suggest that the euro could soon become overvalued if it continues appreciating. Moreover, the euro is already overvalued (beyond the ±10% range) from the point of view of Greece, Ireland and Spain. And PPP estimates suggest that the euro is overvalued by 20% against the USD.

The periphery cannot afford a much stronger euro

The strength of the euro is partly offsetting the competitiveness improvements that the periphery has achieved in recent years. Our estimates suggest that the euro is already too strong for Greece, Ireland and Spain, but within the equilibrium range for Italy and Portugal.

The Phillips Curve for euro-area economies has flattened substantially, which could make rebalancing more difficult, as countries require much higher unemployment (or output gaps) to achieve the same price adjustments. As wages are less reactive than before, peripheral countries need persistently high levels of unemployment to achieve rebalancing through wages.




In our view, there is little room to keep pushing through that route in countries with overleveraged households.

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Wed, 11/06/2013 - 16:04 | 4128110 Winston Churchill
Winston Churchill's picture

With Golden Dawn leading in Greek polls, this is great news.

Wed, 11/06/2013 - 16:15 | 4128128 knukles
knukles's picture

Great news is all about us!
Everything is Healed!
Healed, I say!

Put your hands on the Bloomberg and Pray!


Oh dear Ben of Dover, maketh our New Yellin an a Jellin a Bountifual Bundle of Cheapeth Money.


And just so you all know where your Federal Reserve Swap lines are going....

Wed, 11/06/2013 - 16:21 | 4128166 hedgeless_horseman
hedgeless_horseman's picture



According to our estimates, the euro is currently overvalued by about 7%.

 BofA does not understand the political capital invested in Europe.  They vastly underestimate what the Euro means for the Europeans, for the Euro area.

Wed, 11/06/2013 - 16:43 | 4128262 Oracle 911
Oracle 911's picture

For lot of us (means the 95% population)  € means an utter catastrophe. Because for lot of countries it is to strong, and for lot of countries to week. The 5% are "high class parasites".


So when the EU and/or EMU will fall apart, I will celebrate it with lot of booze and probably with hookers too.



Wed, 11/06/2013 - 17:50 | 4128452 Ghordius
Ghordius's picture

and you pay the booze and the hookers with... ?

Wed, 11/06/2013 - 22:50 | 4129511 edotabin
edotabin's picture

If we look past the normal horseshit, I suppose many Europeans are proud of the Euro. There was no way they could have any influence as individual countries and the Euro is at the moment, by far, the most obvious symbol of their labor towards unity. Everything else depends on it. If 1-2 or countries exit now, the political will shall drop in disproportionate measure to the actual value of the exiting country.

I think it is also very interesting that it has had quite a bit of support from the FED.  Despite what most ordinary people think, this is very much a joint effort and it has everyone's blessing. This is where the average person is "duped". Americans see it as a threat that is dethroning the dollar and Europeans see it as "EU---RO, EU--RO, EU-RO".

In fact, none of this matters too much. The Americans are losing everything to inflation and many Europeans are losing everything as well. This is a transfer of wealth and the furtherance of control through monetary means.

It s about having things of value and seeing past nationalistic or continental pride. In this regard, it doesn't matter where I live. The masters do what they want anyway. Therefore, I do not really care what currency people choose to pay hookers with. It is more about actually being able to pay the hooker.

Thu, 11/07/2013 - 17:39 | 4132555 Oracle 911
Oracle 911's picture

With Cigarets/tobacco, cuz I am nonsmoker but I can garden. :)

Wed, 11/06/2013 - 21:21 | 4129250 thisandthat
thisandthat's picture

Excuse me, what the Euro means for whom, exactly? For the Eurocrats, maybe; for the "Europeans" it basically meant massive losses through rampant inflation.

Wed, 11/06/2013 - 16:47 | 4128279 DoChenRollingBearing
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@ knukles

Ha ha ha!  Excellent post, + 1 big one.

Wed, 11/06/2013 - 16:06 | 4128119 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

In this corner wearing the red trunks, Soooooper Mario Draghi ...

In this corner, in the blue trunks, the fantasmagoric fakery itself, the EUR.

Draghi : You're goin down, fool! We don't need no rate cuts to take you to the canvas! Whatever it takes!

Wed, 11/06/2013 - 16:15 | 4128150 Headbanger
Headbanger's picture

And why am I hearing that said by Howard Cosell like it was yesterday!?

Wed, 11/06/2013 - 19:14 | 4128716 knukles
knukles's picture

"they were bred for sports"

Wed, 11/06/2013 - 16:09 | 4128129 FieldingMellish
FieldingMellish's picture

PIIGS need to have their own garbage currency.

Wed, 11/06/2013 - 16:23 | 4128179 NOTaREALmerican
NOTaREALmerican's picture

Re:  PIIGS need to have their own garbage currency.

In the age of computers it would be better for each US state to have their own too.   The only measure of the relative honestly of the sociopaths running the various state governments would be reflected in their currency.

Wed, 11/06/2013 - 16:49 | 4128285 DoChenRollingBearing
DoChenRollingBearing's picture

Not a bad idea at all...

I would probably hold Texas paper then.

Wed, 11/06/2013 - 20:59 | 4129169 Darksky
Darksky's picture

Texas birth certificate is the most important piece of paper i own.

Wed, 11/06/2013 - 16:19 | 4128164 101 years and c...
101 years and counting's picture

i believe the ball is now in Mario's hands to print moar.  which should send spx straight to 2000 tomorrow.

Wed, 11/06/2013 - 16:22 | 4128172 disabledvet
disabledvet's picture

It was said of the Anglo Saxon Bankers in the 1920's "they played pool with the planets." That was "sans gold standard" I might add. And for an encore they wound up with 50,000 tons of gold and a Marshal Plan. Now we have Teslas, the Permian Basin and Utica Shale. The Japanese just bought the biggest maker of carbon fiber in the world. Nothing new going on here...move along.

Wed, 11/06/2013 - 16:25 | 4128185 NOTaREALmerican
NOTaREALmerican's picture

Re:  That was "sans gold standard"

Somebody famous once said:  The sociopaths will always be with us.  

Wed, 11/06/2013 - 16:26 | 4128175 Dr. Engali
Dr. Engali's picture

Germany to the periphery: give up your sovereignty and we can end this pain now. Just kneel and kiss the ring, and we will issue some bonds.

Wed, 11/06/2013 - 17:39 | 4128422 CrashisOptimistic
CrashisOptimistic's picture

Of course, there is the issue of global cooperation. 

How would it look if the ECB is easing while the US talks of taper?

Wed, 11/06/2013 - 18:03 | 4128477 Papasmurf
Papasmurf's picture

Translation: BofA is short Euro.

Wed, 11/06/2013 - 18:19 | 4128521 Ghordius
Ghordius's picture

as in the last 3 articles of them here on ZH. yet the article is good, imho

Wed, 11/06/2013 - 23:16 | 4129588 dannyboy
dannyboy's picture

As is Goldman, and from what I hear basically every other asswipe bank. Truth be told, so is every trader on zerohedge.

Wed, 11/06/2013 - 18:52 | 4128631 Madcow
Madcow's picture

the EU will not rest until they have achieved complete destruction - and the PIIGS have descended into anarchy and cannibalism. 

Wed, 11/06/2013 - 21:27 | 4129273 thisandthat
thisandthat's picture

For what's worth, foreign tourists have always been a local favorite delicacy ;)

Thu, 11/07/2013 - 00:21 | 4129731 orangegeek
orangegeek's picture

PIIGS should become states of Germany and then Germany can clean up their pens

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