The euro has struggled over the past month as the U.S. dollar has regained its footing, but while the shared currency remains up on the year, investors should rethink their expectations that the shared currency will strengthened rebound against the buck soon, according to recent report from Bank of America Merrill Lynch.
There are at least eight reasons to start selling your euros /zigman2/quotes/210561242/realtime/sampled EURUSD +0.1081% right now, according to BAML currency, rates and emerging-markets strategist, David Woo.
1. Euro strength
The euro appreciated more than 14% in 2017, so much so that the European Central Bank grew concerned about its currency’s strength and possible repercussions. Meanwhile, German and French PMIs have weakened and manufacturing exports have declined. U.S. manufacturing, on the other hand, has picked up.
“The contrast between a weak dollar-strong export orders and a strong euro-weak eurozone export orders leads us to think that the euro appreciation of the past year is beginning to bite,” Woo said.
Bank of America Merrill Lynch
2. Better U.S. growth
Foreign exchange trading always works in pairs, and one reason to ditch the shared European currency in favor of its U.S. rival is that growth in America has improved. Household spending in the U.S. is up, as is real disposable income. With the advent of corporate tax cuts, which lowered taxes for some individuals and corporations in the U.S. Woo also predicts that spending will increase further in the second quarter of the year.
Moreover, the higher rate of business investments should benefit both U.S. productivity and wages, making the growth story here to stay, according to Woo.
3. Lower political risk after Nafta
Canada, Mexico and the U.S. are widely expected to strike a deal in principle in May, ending renegotiations of the North American Free Trade Agreement, which began last year.
Even though an deal in principle would still leave months until the implementation, it should “help show the pragmatic side of the Trump administration’s pursuit of more favorable trade deals,” said Woo.
A successful agreement might even change the standing of the U.S. in trade negotiations with China and could change its calculations behind rejoining the Trans Pacific Partnership, suggested Woo. Trump has asked his top economic advisers to study the possibility of re-entering TPP negotiations.