It may be time for another about face in the ongoing drama of euro hedging. The ECB said last year that it would do “whatever it takes” to save the single currency, and has succeeded. The euro has strengthened significantly as foreign capital flows have rushed into the Eurozone. But with the region’s economy still reeling in many ways, Nomura’s global head of FX strategy, Jens Nordvig, believes the ECB will have to deal with the single currency’s appreciation.
In a new research note, “Currency wars and the euro,” Nordvig writes, “The ECB’s next battle may not be about saving the euro, but about reducing its value.”
While third-quarter GDP for the region was positive, it could have been lost in the rounding, at a teensy 0.1 percent. In year on year terms, GDP remains negative and the unemployment rate is still a staggering 12.2 percent – with some countries like Greece and Spain suffering much more than that. Unemployment is about three percentage points above its historical average, Nordvig notes, and if the euro continues to appreciate it will be strong relative to its history.
Plotted on a scatter graph comparing currency strength and unemployment, the euro is moving to join Hungary, New Zealand, China and a handful of others in the problematic “strong currency, high unemployment” quadrant. “In the terminology of the global financial press, countries in this quadrant are the ones likely to enter a currency war,” Nordvig writes.
If the euro continues to appreciate as it has, attracting foreign capital to the region’s improving credit environment, the impact on Eurozone recovery and growth may be too much for the ECB to ignore. If that happens, Nordvig writes, “The ECB may need to enter the currency war more actively to secure a more competitive euro in 2014, and thereby support a more robust economic recovery.”