Fade The Strong Euro Consensus

You wouldn’t know it from the stock market’s gut-wrenching fourth-quarter decline and 2019’s snapback, but the euro has been downright sleepy.

Be careful because that can change quickly.

EUR/USD touched a recent low of $1.128 in November and has been moving in a 3-cent range ever since, flirting with that level right now. The currency was oblivious to the panic that sent the VIX volatility index for equities to a Lehman-like level of 36 during the lazy days around Christmas.

Figure 1 shows that, over the last five years, EUR has moved a dime or twenty cents as a matter of routine. However, I wouldn’t be complacent; things could get interesting, and soon.

Figure 1: EUR vs. USD

EUR vs. USD

The Lopsided Street

To figure 2, we say “wow.” All but one of the 23 economists who have published a FY19 EUR estimate in February has penciled in strength relative to the USD. As a group, they are also estimating even more strength in 2020.

Figure 2: Wall Street Estimates, EUR/USD

Wall Street Estimates EUR vs USD

Fade Them

But look at the politics, starting with Italy. The European Commission downgraded its forecast for Italy’s 2019 GDP growth to 0.2%, just inches above the red ink of Q3 and Q4.

Italy’s coalition government of protest party leftists and the anti-immigrant right are together attacking French president Emmanuel Macron. The left decries Macron’s “Jupiterian” regime for favoring the rich and being out of touch, a similar charge to the one that brought down former president Nicolas Sarkozy. The right is relentless too, hitting on Macron’s europhilic bona fides and his indifference to immigration grievances in first-port-of-entry countries.

Many Italians claim that EU officialdom is taking a hard line on the Maastricht Treaty’s 3% budget deficit-to-GDP ratio limit—when it comes to them—but is being more lenient with France.

After all, Macron was allowed to do an about-face after he miscalculated car-centric rural France’s rage against his 2018 gasoline taxes. The gilet jaunes (yellow vest) protests were effective—Macron crawled back to the Élysée with his tax plan scrapped and an extra €11 billion in fiscal largesse thrown in for good measure.

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