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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Winston Churchill's picture

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

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....

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.

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.



Ghordius's picture

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

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.

Oracle 911's picture

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

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.

DoChenRollingBearing's picture

@ knukles

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

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!

Headbanger's picture

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

knukles's picture

"they were bred for sports"

FieldingMellish's picture

PIIGS need to have their own garbage currency.

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.

DoChenRollingBearing's picture

Not a bad idea at all...

I would probably hold Texas paper then.

Darksky's picture

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

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.

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.

NOTaREALmerican's picture

Re:  That was "sans gold standard"

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

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.

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?

Papasmurf's picture

Translation: BofA is short Euro.

Ghordius's picture

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

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.

Madcow's picture

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

thisandthat's picture

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

orangegeek's picture

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