FX INTERVIEW
We also need to ensure that credit is flowing again, because the balkanization of the EMU capital markets are creating very strong headwinds to the healing process of the Eurozone. What I mean by that is that companies are paying different interest rates even if they have the same credit quality depending on where they are operating. Mone t a r y conditions are tight in the peripherals and loose in the core, which explains why
countries
the peripheral are
underper forming. We need to address the banking sector by
bringing banking forward. As the
union long
as credit remains fragmented, Europe will face bigger problems ahead.
“High unemployment could reduce the political acceptance of the increasing integration
of the currency union.”
FXTM Would you agree that we are facing def lationary pressure in the EZ and do you think the ECB can (and should) go the way of the BOJ to prevent a Japanese style “lost decade” (or more like a couple of decades)?
HR Def lation will
be a threat as long as monetary multipliers 30 FX TRADER MAGAZINE July - September 2013
market is too high. The only risk is that the policies might lead to misallocation of capital and asset price inf lation.
FXTM Your research suggests that the value of the “German euro” is closer to 1.53 and the country’s exporters are the biggest beneficiaries from an actually weaker Euro. At what
are not working. If they were to move higher, then of course inf lationary risks would increase. Unemployment rates are high, which means that we
have a
substantial underutilization of our labor force. Nevertheless, increased inf lation rates due to higher wage rates are unlikely because the slack in the labor
rate do you find it realistic for the peripheral EZ countries to export their way out of trouble?
HR Our models show that “fair” exchange rates in the Eurozone differ quite substantially. Germany at 1.53 and Ireland at 1.45 are among the top. Italy, instead, is running at 1.19. Global growth remains weak and there is a substantial growth risk
coming out
of Asia and the emerging markets. According to our analysis, EURUSD would have to trade below 1.19 for a substantial period of time in order to ensure the required income. The
situation
in the periphery would
substantially
improve if
EURUSD was trading closer to 1.10. This is justified from a US dollar’s perspective as well, given that the outlook for the USD is quite bright and the US can cope better with currency strength than Europe.
FXTM The Swiss National Bank has a massive amount of foreign
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