Could The Euro Be Toxic? - BofA Merrill

[thenews]

"The debate on currency wars, which reached a climax in 2009 when the Fed launched its first QE, has been revived by Japanese talk of loosening monetary policy further. Among the Bank of Japan, the Bank of England and the Fed, the ECB actually stands out for not signalling any desire to undertake further monetary loosening. Rather, banks have started to repay some of the long-term refinancing operation money. This has added to the feeling that the ECB’s monetary stance is getting tighter rather than looser, even though the ECB has not changed its stance. As a result, fears of a rising euro have increased, even with the euro just starting to appreciate, though only modestly. In our view, persistent exchange rate appreciation would disproportionately impact those countries that specialize in more exchange rate-sensitive sectors, and which are relatively more open; particularly the former, since we argue that the geographical diversification effect is weak. Taking all factors into consideration, Germany and France appear slightly less vulnerable to euro appreciation than Spain and Italy, although our analysis suggests the differences would be small."

Laurence Boone & Ruben Segura-Cayuela - Bank Of America Merrill Lynch

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