Sort of. The larger fiscal response with large import content and impact on CA is a weight on USD. The EUR appreciation, however, came about after the larger (sequentially) part of the USD fiscal response. This was more a reaction to the Recovery Fund, which is a small future fiscal commitment but which provides BOP support to the periphery and therefore removes fragmentation risk and lowers the need to rely on ECB support. So the exchange rate more is linked to relative fiscal-monetary responses, but subtlety so.
In addition, running a current account surplus of nearly USD300BN and positioning as a reserve currency, EUR has some tailwinds that are the flip side to the USD situation in recent years.
Thank you. So EUR appreciation is more a political risk (lower fragmentation risk), CA+ ( and narrower real rate diff) than a money supply/quantity story ?
Exactly, with the caveat that the relative money responses also play a role, but have to be folded into the overall removal of tail risk (Recovery Fund) and the structural stories.
Is there a link between M2 increasing more and faster in the US vs EZ and EUR appreciation vs the USD?
Sort of. The larger fiscal response with large import content and impact on CA is a weight on USD. The EUR appreciation, however, came about after the larger (sequentially) part of the USD fiscal response. This was more a reaction to the Recovery Fund, which is a small future fiscal commitment but which provides BOP support to the periphery and therefore removes fragmentation risk and lowers the need to rely on ECB support. So the exchange rate more is linked to relative fiscal-monetary responses, but subtlety so.
In addition, running a current account surplus of nearly USD300BN and positioning as a reserve currency, EUR has some tailwinds that are the flip side to the USD situation in recent years.
At least, that’s my personal view.
Thank you. So EUR appreciation is more a political risk (lower fragmentation risk), CA+ ( and narrower real rate diff) than a money supply/quantity story ?
Exactly, with the caveat that the relative money responses also play a role, but have to be folded into the overall removal of tail risk (Recovery Fund) and the structural stories.