The Danske G10 Medium-term Valuation (MEVA) model continues to point to significant upside in EUR/USD with fundamentals now pinning the cross as high as 1.31. Thus 'gravity' remains for a renewed move higher in the cross.
The EUR/SEK estimate also moves higher still, now standing at 9.95. This 'high' fundamental level is one argument as to why downside in the pair should be limited in 2019.
Since our spring update, see FX Strategy: Trump in MEVA space: US isolation puts USD at risk , 14 March 2018, a few notable shifts have taken place in the Danske G10 Medium-term Valuation (MEVA) model estimates for notably EUR/USD and EUR/SEK; see full set of estimates in table below and in charts overleaf.
MEVA continues to point to significant upside in EUR/USD with fundamentals now pinning the cross at 1.31 (previously 1.28). This implies that 'gravity' remains for a renewed move higher in the cross over the 'medium term'. The cause of the continued move higher in the EUR/USD estimate is a combination of both model factors as the productivity-differential and the terms-of-trade component alike have moved in favour of EUR vs USD lately. We still see the key trigger for a fundamental correction to be initiated being the ECB closing in on the first rate hike . But, we also note that should the Trump administration invoke more explicitly on a 'weak dollar' policy e.g. using FX intervention as part of the trade war, a move higher in EUR/USD could happen very swiftly given the distinct fundamental misalignment of the two currencies.
Further, the EUR/SEK estimate continues to move higher to now stand at 9.95 (previously 9.65). Again, it is both model components that have been upping the fundamental value recently. Relative to PPP estimates for the cross (our PPP model points to 8.42), the MEVA estimate is thus rather 'high'. This adds another argument - beyond a hesitant-to-hike Riksbank - as to why downside in the pair should be limited in 2019.
Finally, while Brexit leaves GBP fundamental estimates flawed with uncertainty, we note that medium-term fundamentals have moved in favour of GBP relative to USD lately with the MEVA estimate for GBP/USD now at 1.74; cable indeed stands for the biggest misalignment in the model. Our 'Brexit-corrected' estimate of EUR/GBP is 0.82, and we indeed expect a significant correction lower in the pair, removing the current 'no-deal' risk premium, once a Brexit deal is eventually agreed upon.
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