We present ten reasons that will sustain a further euro appreciation
(FXE) to 1.50 in the upcoming two to four years. The main one is that
Germans are net global creditors and Americans net debtors. This is
reflected in fiscal and monetary policy and in investors' behaviour.
The financial establishment still bets on a strong dollar
The
opinions of the financial establishment are usually very volatile: in
Summer 2011, they were very bullish on emerging markets and gold, since
the beginning of 2013, they have become dollar bulls.
(click to enlarge)
source
In
June, when EUR/USD was trading under 1.30, Pictet was saying "The
dollar is ready for a steady rise"; we replied "Pictet Become Secular
Dollar Bulls and Gold Bashers: Our Response". Our reasoning against the
dollar bulls was that the slowing in China was only temporary and caused
by European austerity.
Some months later, growth in China rebounded. According to the OECD it will grow by 8.2% in 2014.
In
July we published a history comparison piece and maintained "Why There
Won't Be A Strong Dollar, Even If the Financial Establishment Thinks
So". Our main point was that the Fed will not hike rates any time soon.
Therefore Americans will not repatriate their investments in foreign
securities and many will remain short the US dollar.
We are not
continuous euro bulls, in January even German growth prospects seemed
affected. We were asking whether peripheral trade surpluses were
sustainable given that they were achieved with just spending cuts. At
the time we were betting against the euro, at levels of 1.34. Some time
later it fell to 1.27.
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