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The incredibly shrinking euro?

Posted: 1st October 2014

BARCLAYS_COL 300dpiThe robust quantitative easing program put in place by the European Central Bank (ECB) recently will be instrumental in pushing the euro lower, thus stimulating the export side of the euro zone economy. Growth in other parts of the globe will also help cheaper imports from the currency bloc find a home.

Calls for a dramatic drop in the currency have made headlines recently, but strike me as wishful thinking. To be sure, money printing that suppresses interest rates weighs on the currency, and the euro should be lower to provide cover for a program of reforms. But, unless the ECB opts to target a level for the euro – akin to what the Swiss National Bank did for the franc/euro rate – it’s hard to see how such a drop would occur.

Even in the midst of its existential crisis in 2012, the euro only fell to 1.20 relative to the US dollar. A decline again to this level would represent nearly a 14% drop from its 1.39 peak this year. German policymakers will not be willing participants in a currency that infuses inflationary pressures into its economy. Weak growth and higher inflation are a recipe for short careers.

The investment implications for the current state of play are clear, in our view, although you should bear in mind that you could still lose out. We are overweight euro zone equities based on two fundamental ideas: first, we believe their equity valuations are attractive especially when compared to their US counterparts. Second, the catalyst that would make the market rise is a more proactive stance from the ECB.

This is the policy we have been calling and hoping for, and it has finally arrived. It’s late in coming, but it’s here. The market has taken note, as shown by the EuroStoxx 50 Index which has advanced significantly since early August. So far, so good.

Business Comment

Business Comment is the Edinburgh Chamber of Commerce’s bi-monthly magazine. It provides insight on Edinburgh’s vibrant business community, with features on the city’s key sectors, interviews with leading figures and news on new business developments in the capital.
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