2017: EUR/USD to strengthen sharply in 2017

Consensus said:

No change in EUR/USD predicted. 

We said:

The euro is undervalued. We compare the currency’s broad real trade-weighted index, based on relative unit labour costs, with its long-run trend. By this measure, the euro is around 10% below its ‘fair value’ even though the euro area is running the biggest current account surplus since 1999. Something’s got to give. Our bet is on the euro. The trigger for the upswing is likely to be when the market begins to price in a ‘proper’ taper of ECB QE in late summer. The impact on the euro could be sharp.    

Suppressed EA yields have played a key role in keeping the euro artificially low. But yield differentials are stretched and are ripe for a correction. Weak EA growth drove equity investments out of the EA. But as the recovery unfolds, this pressure is easing. Crucially, because a large proportion of European investors' assets abroad is unhedged, the turnaround in the financial account balance and the surge in the euro, when they occur, may be more potent than many anticipate.  

Outcome:

EUR-USD rose 15% from 1.062 at time of publication to peak at 1.203 on 10 September. 12 months after our call EUR-USD was at 1.223. 

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